Export-Import Policy, Procedures and Documentation

Unit 1:

Foreign Trade Policy

Payment Methods in Export Import Trade.
 Clean Payments
o Advance Payment
o Open Account 
 Payment Collection of Bills in International Trade
o Documents Against Payment D/P
o Documents Against Acceptance D/A
o Letter of Credit  L/c
 Revocable & Irrevocable Letter of Credit (L/c)
 Sight & Time Letter of Credit
 Confirmed Letter of Credit (L/c)

There are 3 standard ways of payment methods in the export import trade
international trade market:

1. Clean Payment
2. Collection of Bills
3. Letters of Credit L/c

1. Clean Payments

In clean payment method, all shipping documents, including title documents

are handled directly between the trading partners. The role of banks is limited
to clearing amounts as required. Clean payment method offers a relatively
cheap and uncomplicated method of payment for both importers and
exporters.

There are basically two type of clean payments:

Advance Payment

In advance payment method the exporter is trusted to ship the goods after
receiving payment from the importer.

Open Account

In open account method the importer is trusted to pay the exporter after
receipt of goods. 
The main drawback of open account method is that exporter assumes all the
risks while the importer get the advantage over the delay use of company's
cash resources and is also not responsible for the risk associated with goods.

2. Payment Collection of Bills in International Trade

The Payment Collection of Bills also called “Uniform Rules for

Collections” is published by International Chamber of Commerce (ICC)
under the document number 522 (URC522) and is followed by more than
90% of the world's banks.
In this method of payment in international trade the exporter entrusts the
handling of commercial and often financial documents to banks and gives
the banks necessary instructions concerning the release of these
documents to the Importer. It is considered to be one of the cost effective
methods of evidencing a transaction for buyers, where documents are
manipulated via the banking system.

There are two methods of collections of bill :

Documents Against Payment  D/P

In this case documents are released to the importer only when the payment has
been done.

Documents Against Acceptance  D/A

In this case documents are released to the importer only against acceptance of
a draft.

3. Letter of Credit  L/c

Letter of Credit also known as Documentary Credit is a written undertaking by

the importers bank known as the issuing bank on behalf of its customer, the
importer (applicant), promising to effect payment in favor of the exporter
(beneficiary) up to a stated sum of money, within a prescribed time limit and
against stipulated documents. It is published by the International Chamber of
Commerce under the provision of Uniform Custom and Practices (UCP) brochure
number 500.

Various types of L/Cs are :

Revocable & Irrevocable Letter of Credit (L/c)

A Revocable Letter of Credit can be cancelled without the consent of the

exporter. 
An Irrevocable Letter of Credit cannot be cancelled or amended without the
consent of all parties including the exporter.

Sight & Time Letter of Credit

If payment is to be made at the time of presenting the document then it is

referred as the Sight Letter of Credit. In this case banks are allowed to take
the necessary time required to check the documents.
If payment is to be made after the lapse of  a particular time period as stated
in the draft then it is referred as  the Term Letter of Credit.

Confirmed Letter of Credit (L/c)

Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds
its commitment to that of the issuing bank. By adding its commitment, the
 Confirming Bank takes the responsibility of claim under the letter of credit,
assuming all terms and conditions of the letter of credit are met.

Payments collection methods in Export Import International Trade.  

 Introduction

 Role of Various Parties

o Exporter

o Exporter's Bank

o Buyer/Importer

o Importe's Bank

 Documents Against Payments  (D/P)

 Docuemts Against Aceptance (D/A)

 Usance D/P Bills

Introduction

Payment Collection Against Bills also known documentary collection as  is a payment method used in
international trade all over the world by the exporter for the handling of documents to the buyer's
bank and also gives the banks necessary instructions indicating when and on what conditions these
documents can be released to the importer.

Collection Against Bills is published by International Chambers of Commerce (ICC), Paris, France. The

last updated issue of its rule was published on January 1, 1966 and is know as the URC 522.

It is different from the letters of credit, in the sense that the bank only acts as a medium for the
transfer of documents but does not make any payment guarantee. However, collection of documents
are subjected to the Uniform Rules for Collections published by the International Chamber of
Commerce (ICC).

Role of Various Parties

Exporter

The seller ships the goods and then hands over the document related to the goods to their banks with
the instruction on how and when the buyer would pay.

Exporter's Bank
The exporter's bank is known as the remitting bank , and they remit the bill for collection with proper
instructions. The role of the remitting bank is to :

 Check that the documents for consistency.

 Send the documents to a bank in the buyer's country with instructions on collecting payment.
 Pay the exporter when it receives payments from the collecting bank.

Buyer/Importer

The buyer / importer is the drawee of the Bill.

The role of the importer is to :

 Pay the bill as mention in the agreement (or promise to pay later).
 Take the shipping documents (unless it is a clean bill) and clear the  goods.

Importer's Bank

This is a bank in the importer's country : usually a branch or correspondent bank of the remitting bank
but any other bank can also be used on the request of exporter.

The collecting bank act as the remitting bank's agent and clearly follows the instructions on the
remitting bank's covering schedule. However the collecting bank does not guarantee payment of the
bills except in very unusual circumstance for undoubted customer , which is called availing. 

Importer's bank is known as the collecting / presenting bank. The role of the collecting banks is to :

 Act as the remitting bank's agent

 Present the bill to the buyer for payment or acceptance.
 Release the documents to the buyer when the exporter's instructions have been followed.
 Remit the proceeds of the bill according to the Remitting Bank's schedule instructions.

If the bill is unpaid / unaccepted, the collecting bank :

 May arrange storage and insurance for the goods as per remitting bank instructions on the
schedule.
 Protests on behalf of the remitting bank (if the Remitting Bank's schedule states Protest)
 Requests further instruction from the remitting bank, if there is a problem that is not covered
by the instructions in the schedule.
 Once payment is received from the importer, the collecting bank remits the proceeds promptly
to the remitting bank less its charges.

Documents Against Payments  (D/P)

This is sometimes also referred  as Cash against Documents/Cash on Delivery. In effect D/P means
payable at sight (on demand). The collecting bank hands over the shipping documents including the
document of title (bill of lading) only when the importer has paid the bill. The drawee is usually
expected to pay within 3 working days of presentation. The attached instructions to the shipping
documents would show "Release Documents Against Payment"

Risks :
Under D/P terms the exporter keeps control of the goods (through the banks) until the importer pays.
If the importer refuses to pay, the exporter can:

 Protest the bill and take him to court (may be expensive and difficult to control from another
country).
 Find another buyer or arrange a sale by an auction.

With the last two choices, the price obtained may be lower but probably still better than shipping the
goods back, sometimes, the exporter will have a contact or agent in the importer's country that can
help with any arrangements. In such a situation, an agent is often referred to as a CaseofNeed, means
someone who can be contacted in case of need by the collecting bank.

If the importers refuses to pay, the collecting bank can act on the exporter's instructions shown in the
Remitting Bank schedule. These instructions may include:

 Removal of the goods from the port to a warehouse and insure them.
 Contact the case of need who may negotiate with the importer.
 Protesting the bill through the bank's lawyer.

Docuemts Against Aceptance (D/A)

Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of credit is
referred to as Usance, The importer/ drawee is required to accept the bill to make a signed promise to
pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the
documents and clear his goods.

The payment date is calculated from the term of the bill, which is usually a multiple of 30 days and
start either from sight or form the date of shipment, whichever is stated on the bill of exchange. The
attached instruction would show "Release Documents Against Acceptance".

Risk

Under D/A terms the importer can inspect the documents and , if he is satisfied, accept the bill for
payment o the due date, take the documents and clear the goods; the exporter loses control of them.
The exporter runs various risk. The importer might refuse to pay on the due date because :

 He finds that the goods are not what he ordered.

 He has not been able to sell the goods.
 He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the
importer to court but this can be expensive).
 The importer might have gone bankrupt, in which case the exporter will probably never get his
money.

Usance D/P Bills

A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified date in
future but does not receive the documents until he has actually paid for them. The reason is that
airmailed documents may arrive much earlier than the goods shipped by sea.

The buyer is not responsible to pay the bill before its due date, but he may want to do so, if the ship
arrives before that date. This mode of payments is less usual, but offers more settlement possibility.
These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative the
covering scheduled may simply allow acceptance or payments to be deferred awaiting arrival of
carrying vessel.

There are different types of usance D/P bills, some of which do not require acceptance specially those
drawn payable at a fix period after date or drawn payable at a fixed date. 
Bills requiring acceptance are those drawn at a fix period after sight, which is necessary to establish
the maturity date. If there are problems regarding storage of goods under a usance D/P bill, the
collecting bank should notify the remitting bank without delay for instructions.

However, it should be  noted that it is not necessary for the collecting bank to follow each and every
instructions given by the Remitting Banks.

Letter of Credit(L/c) Documentry Collection.

 

 Introduction

 Parties to Letters of Credit

 Types of Letter of Credit

 Standby Letter of Credit  L/c

 Import Operations Under L/c

 Export Operations Under L/c

 Fees And Reimbursements

 Regulatory Requirements

 Trade Control Requirements

 Exchange Control Requirements

 UCPDC Guidelines

 ISBP 2002

 FEDAI Guidelines

 Fixing limits for Commercial Stand by Letter of Credit   L/c

Introduction
Letter of Credit  L/c also known as Documentary Credit is a widely used term to make payment secure
in domestic and international trade. The document is issued by a financial organization at the buyer
request. Buyer also provide the necessary instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary
Credit (UCPDC) defines L/C as: 

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the
request and on the instructions of a customer (the Applicant) or on its own behalf :

1. Is to make a payment to or to the order  third party ( the beneficiary ) or is to accept bills of
exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills of exchange
(draft).
3. Authorised another bank to negotiate against stipulated documents provided that the terms are
complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods.
The decision to pay under a letter of credit will be based entirely on whether the documents presented
to the bank appear on their face to be in accordance with the terms and conditions of the letter of
credit.

Parties to Letters of  Credit

 Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or

customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at
his request and on the basis of his instructions.

 Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and
takes the responsibility to make the payments on receipt of the documents from the
beneficiary or through their banker. The payments has to be made to the beneficiary within
seven working days from the date of receipt of documents at their end, provided the
documents are in accordance with the terms and conditions of the letter of credit. If the
documents are discrepant one, the rejection thereof to be communicated within seven working
days from the date of of receipt of documents at their end.  

 Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive
payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain
payment on surrender of stipulated document and comply with the term and conditions of the
L/c.
If L/c is a transferable one and he transfers the credit to another party, then he is referred to
as the first or original beneficiary.

 Advising Bank : An Advising Bank provides advice to the beneficiary and takes the
responsibility for sending the documents to the issuing bank and is normally located in the
country of the beneficiary.

 Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank,
thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in
additional to that of the issuing bank. Confirming bank play an important role where the
exporter is not satisfied with the undertaking of only the issuing bank. 
  Negotiating Bank:  The Negotiating Bank is the bank who negotiates the documents submitted
to them by the beneficiary under the credit either advised through them or restricted to them
for negotiation. On negotiation of the documents they will claim the reimbursement under the
credit and makes the payment to the beneficiary provided the documents submitted are in
accordance with the terms and conditions of the letters of credit. 

 Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the reimbursement
claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating
bank. It is normally the bank with which issuing bank has an account from which payment has
to be made. 

 Second Beneficiary : Second Beneficiary is the person who represent the first or original
Beneficiary of credit in his absence. In this case, the credits belonging to the original
beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

Types of Letter of Credit

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank
without notification.  It is rarely used in international trade and not considered satisfactory for the
exporters but has an advantage over that of the importers and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be
confirmed. It should be indicated in LC that the credit is revocable. if there is no such indication the
credit will be deemed as irrevocable.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement of the issuing
bank, the confirming bank, and the beneficiary.  Form an exporters point of view it is believed to be
more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the
required documents are presented and the terms and conditions are complied with, payment will be
made. 

3. Confirmed Letter of Credit  L/c

Confirmed Letter of Credit is a special type of L/c in which another bank apart from the issuing bank
has added its guarantee. Although,  the cost of confirming by two banks makes it costlier, this type of 
L/c is more beneficial for the beneficiary as it doubles the guarantee.

4. Sight Credit and Usance Credit  L/c

Sight credit states that the payments would be made by the issuing bank at sight, on demand or on
presentation. In case of usance credit, draft are drawn on the issuing bank or the correspondent bank
at specified usance period. The credit will indicate whether the usance draft are to be drawn on the
issuing bank or in the case of confirmed credit on the confirming bank.

5. Back to Back Letter of Credit  L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as backtoback
credit when a L/c is opened with security of another L/c.
A backtoback credit which can also be referred as credit and countercredit is actually a method of
financing both sides of a transaction in which a middleman buys goods from one customer and sells
them to another.

The parties to a BacktoBack Letter of Credit are: 

    1.  The buyer and his bank as the issuer of the original Letter of Credit. 
    2.  The seller/manufacturer and his bank, 
    3.  The manufacturer's subcontractor and his bank.

The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of a
particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with
near identical terms in favour as security and will be able to obtain reimbursement by presenting the
documents received under back to back credit under the main L/c.

The need for such credits arise mainly when :

1. The ultimate buyer not ready for a transferable credit

2. The Beneficiary do not want to disclose the source of supply to the openers.
3. The manufacturer demands on payment against documents for goods but the beneficiary of
credit is short of the funds

6. Transferable Letter of Credit  L/c

A transferable documentary credit is a type of credit under which the first beneficiary which is usually
a middleman may request the nominated bank to transfer credit in whole or in part to the second
beneficiary. 

The L/c does state clearly mentions the margins of the first beneficiary and unless it is specified the
L/c cannot be treated as transferable. It can only be used when the company is selling the product of a
third party and the proper care has to be taken about the exit policy for the money transactions that
take place. 

This type of L/c is used in the companies that act as a middle man during the transaction but don’t
have large limit. In the transferable L/c there is a right to substitute the invoice and the whole value
can be transferred to a second beneficiary.

The first beneficiary or middleman has rights to change the following terms and conditions of the letter
of credit:

1. Reduce the amount of the credit.

2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover must be effected.
7. Substitute the name of the applicant (the middleman) for that of the first beneficiary (the
buyer). 

Standby Letter of Credit  L/c

Initially used by the banks in the United States, the standby letter of credit is very much similar in
nature to a bank guarantee. The main objective of issuing such a credit is to secure bank loans.
Standby credits are usually issued by the applicant’s bank in the applicant’s country and advised to the
beneficiary by a bank in the beneficiary’s country.

 Unlike a traditional letter of credit where the beneficiary obtains payment against documents
evidencing performance, the standby letter of credit allow a beneficiary to obtains payment from a
bank even when the applicant for the credit has failed to perform as per bond.  

A standby letter of credit is subject to "Uniform Customs and Practice for Documentary Credit" (UCP),
International Chamber of Commerce Publication No 500, 1993 Revision, or "International Standby
Practices" (ISP), International Chamber of Commerce Publication No 590, 1998.

Import Operations Under  L/c

The Import Letter of Credit guarantees an exporter payment for goods or services, provided the terms
of the letter of credit have been met.

A bank issue an import letter of credit on the behalf of an importer or buyer under the following
Circumstances

 When a importer is importing goods within its own country.

 When a trader is buying good from his own country and sell it to the another country for the
purpose of merchandizing trade.
 When an Indian exporter who is executing a contract outside his own country requires
importing goods from a third country to the country where he is executing the contract.

The first category of the most common in the day to day banking

Fees And Reimbursements

The different charges/fees payable under import L/c is briefly as follows

1. The issuing bank charges the applicant fees for opening the letter of credit. The fee charged
depends on the credit of the applicant, and primarily comprises of :

(a) Opening Charges  This would comprise commitment charges and usance charged to be charged
upfront for the period of the L/c.

 The fee charged by the L/c opening bank during the commitment period is referred to as commitment
fees. Commitment period is the period from the opening of the letter of credit until the last date of
negotiation of documents under the L/c or the expiry of the L/c, whichever is later.

Usance is the credit period agreed between the buyer and the seller under the letter of credit. This
may vary from 7 days usance (sight) to 90/180 days. The fee charged by bank for the usance period is
referred to as usance charges

(b)Retirement Charges

1. This would be payable at the time of retirement of LCs. LC opening bank scrutinizes the bills under
the LCs according to UCPDC guidelines , and levies charges based on value of goods.

2. The advising bank charges an advising fee to the beneficiary unless stated otherwise The fees could
vary depending on the country of the beneficiary. The advising bank charges may be eventually borne
by the issuing bank or reimbursed from the applicant.

3. The applicant is bounded and liable to indemnify banks against all obligations and responsibilities
imposed by foreign laws and usage.

4. The confirming bank's fee depends on the credit of the issuing bank and would be borne by the
beneficiary or the issuing bank (applicant eventually) depending on the terms of contract.

5. The reimbursing bank charges are to the account of the issuing bank.

Risk  Associated  with Opening Imports L/cs

The basic risk associated with an issuing bank while opening an import L/c are :

1. The financial standing of the importer

As the bank is responsible to pay the money on the behalf of the importer, thereby the bank
should make sure that it has the proper funds to pay.
2. The goods
Bankers need to do a detail analysis against the risks associated with perishability of the goods,
possible obsolescence, import regulations packing and storage, etc. Price risk is the another
crucial factor associated with all modes of international trade.
3. Exporter Risk
There is always the risk of exporting inferior quality goods. Banks need to be protective by
finding out as much possible about the exporter using status report and other confidential
information.
4. Country Risk
These types of risks are mainly associated with the political and economic scenario of a
country. To solve this issue, most banks have specialized unit which control the level of
exposure that that the bank will assumes for each country.
5. Foreign exchange risk
Foreign exchange risk is another most sensitive risk associated with the banks. As the
transaction is done in foreign currency, the traders depend a lot on exchange rate fluctuations.

Export  Operations Under L/c

Export Letter of Credit is issued in for a trader for his native country for the purchase of goods and
services. Such letters of credit may be received for following purpose:

1. For physical export of goods and services from India to a Foreign Country.
2. For execution of projects outside India by Indian exporters by supply of goods and services from
Indian or partly from India and partly from outside India.
3. Towards deemed exports where there is no physical movements of goods from outside India But
the supplies are being made to a project financed in foreign exchange by multilateral agencies,
organization or project being executed in India with the aid of external agencies.
4. For sale of goods by Indian exporters with total procurement and supply from outside India. In
all the above cases there would be earning of Foreign Exchange or conservation of  Foreign
Exchange.

Banks in India associated themselves with the export letters of credit in various capacities such as
advising bank, confirming bank, transferring bank and reimbursing bank.

In every cases the bank will be rendering services not only to the Issuing Bank as its agent
correspondent bank but also to the exporter in advising and financing his export activity.
 1. Advising an Export L/c
The basic responsibility of an advising bank is to advise the credit received from its overseas
branch after checking the apparent genuineness of the credit recognized by the issuing bank. 

It is also necessary for the advising bank to go through the letter of credit, try to understand
the underlying transaction, terms and conditions of the credit and advice the beneficiary in the
matter.

The main features of advising export LCs are:

1. There are no credit risks as the bank receives a onetime commission for the advising
service. 
2. There are no capital adequacy needs for the advising function.

2. Advising of Amendments to L/Cs

Amendment of LCs is done for various reasons and it is necessary to fallow all the necessary the
procedures outlined for advising. In the process of advising the amendments the Issuing bank
serializes the amendment number and also ensures that no previous amendment is missing from
the list. Only on receipt of satisfactory information/ clarification the amendment may be
advised.

3. Confirmation of Export Letters of Credit

It constitutes a definite undertaking of the confirming bank, in addition to that of the issuing
bank, which undertakes the sight payment, deferred payment, acceptance or negotiation.

Banks in India have the facility of covering the credit confirmation risks with ECGC under their
“Transfer Guarantee” scheme and include both the commercial and political risk involved.
4. Discounting/Negotiation of Export LCs
When the exporter requires funds before due date then he can discount or negotiate the LCs
with the negotiating bank. Once the issuing bank nominates the negotiating bank, it can take
the credit risk on the issuing bank or confirming bank.

However, in such a situation, the negotiating bank bears the risk associated with the document
that sometimes arises when the issuing bank discover discrepancies in the documents and
refuses to honor its commitment on the due date. 

5. Reimbursement of Export LCs 

Sometimes reimbursing bank, on the recommendation of issuing bank allows the negotiating
bank to collect the money from the reimbursing bank once the goods have been shipped. It is
quite similar to a cheque facility provided by a bank.

In return, the reimbursement bank earns a commission per transaction and enjoys float income
without getting involve in the checking the transaction documents. 

reimbursement bank play an important role in payment on the due date ( for usance LCs) or
the days on which the negotiating bank demands the same (for sight LCs)

Regulatory Requirements

Opening of imports LCs in India involve compliance of the following main regulation:

Trade Control Requirements

The movement of good in India is guided by a predefined se of rules and regulation. So, the banker
needs to assure that make certain is whether the goods concerned can be physically brought in
to India or not as per the current EXIM policy.

Exchange Control Requirements

The main objective of a bank to open an Import LC is to effect settlement of payment due by the
Indian importer to the overseas supplier, so opening of LC automatically comes under the policies of
exchange control regulations.

UCPDC Guidelines

Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined rules established
by the International Chamber of Commerce (ICC) on Letters of Credit. The UCPDC is used by bankers
and commercial parties in more than 200 countries including India to facilitate trade and payment
through LC.

UCPDC was first published in 1933 and subsequently updating it throughout the years. In 1994, UCPDC
500 was released with only 7 chapters containing in all 49 articles . 

The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25
October 2006. This latest version, called the UCPDC600, formally commenced on 1 July 2007. It contain
a total of about 39 articles covering the following areas, which can be classified as 8 sections according
to their functions and operational procedures.

Serial No. Article Area Consisting

Application, Definition and

1. 1 to 3 General
Interpretations

Credit vs. Contracts, Documents

2. 4 to 12 Obligations
vs. Goods

Reimbursement, Examination of 

Liabilities and  Documents, Complying,
3. 13 to 16
responsibilities. Presentation, Handling
Discrepant Documents

Bill of Lading, Chapter Party Bill of 

Lading, Air Documents, Road Rail
4. 17 to 28 Documents etc. Documents, Courier , Postal etc.
Receipt. On board, Shippers' count,
Clean Documents, Insurance documents

Extension of dates, Tolerance in

Miscellaneous
5. 29 to 33 Credits, Partial Shipment and 
Provisions
Drawings. House of Presentation

6 34 to 37 Disclaimer Effectiveness of Document

 Transmission and Translation
Force Majeure 
Acts of an Instructed Party

Transferable Credits 
7 38 & 39 Others
Assignment of Proceeds

ISBP 2002

The widely acclaimed International Standard Banking Practice(ISBP)  for the Examination of Documents
under Documentary Credits was selected in 2007 by the ICCs Banking Commission. 

First introduced in 2002, the ISBP contains a list of guidelines that an examiner needs to check the
documents presented under the Letter of Credit. Its main objective is to reduce the number of
documentary credits rejected by banks.

FEDAI Guidelines

Foreign Exchange Dealer's Association of India (FEDAI) was established in 1958 under the Section 25 of
the Companies Act (1956). It is an association of banks that deals in Indian foreign exchange and work
in coordination with the Reserve Bank of India, other organizations like FIMMDA, the Forex Association
of India and various market participants.
FEDAI has issued rules for import LCs which is one of the important area of foreign currency exchanges.
It has an advantage over that of the authorized dealers who are now allowed by the RBI to issue stand
by letter of credits towards import of goods.

As the issuance of stand by of letter of Credit including imports of goods is susceptible to some risk in
the absence of evidence of shipment, therefore the importer should be advised that documentary
credit under UCP 500/600 should be the preferred route for importers of goods.

Below mention are some of the necessary precaution that should be taken by authorised dealers While
issuing a stands by letter of credits: 

1. The facility of issuing Commercial Standby shall be extended on a selective basis and to the
following category of importers
i. Where such standby are required by applicant who are independent power
producers/importers of crude oil and petroleum products
ii. Special category of importers namely export houses, trading houses, star trading
houses, super star trading houses or 100% Export Oriented Units.
2. Satisfactory credit report on the overseas supplier should be obtained by the issuing banks
before issuing Stands by Letter of Credit.
3. Invocation of the Commercial standby by the beneficiary is to be supported by proper
evidence. The beneficiary of the Credit should furnish a declaration to the effect that the
claim is made on account of failure of the importers to abide by his contractual obligation
along with the following documents.
i. A copy of invoice.
ii. Nonnegotiable set of documents including a copy of non negotiable bill of
lading/transport document.
iii. A copy of Lloyds /SGS inspection certificate wherever provided for as per the
underlying contract.
 4. Incorporation of a suitable clauses to the effect that in the event of such invoice /shipping
documents has been paid by the authorised dealers earlier, Provisions to dishonor the claim
quoting the date / manner of earlier payments of such documents may be considered.
5. The applicant of a commercial stand by letter of credit shall undertake to provide evidence of
imports in respect of all payments made under standby. (Bill of Entry)

Fixing limits for Commercial Stand by Letter of Credit   L/c

1. Banks must assess the credit risk in relation to stand by letter of credit and explain to the
importer about the inherent risk in stand by covering import of goods.
2. Discretionary powers for sanctioning standby letter of credit for import of goods should be
delegated to controlling office or zonal office only.
3. A separate limit for establishing stand by letter of credit is desirable rather than permitting it
under the regular documentary limit.
4. Due diligence of the importer as well as on the beneficiary is essential .
5. Unlike documentary credit, banks do not hold original negotiable documents of titles to gods.
Hence while assessing and fixing credit limits for standby letter of credits banks shall treat
such limits as clean for the purpose of discretionary lending powers and compliance with
various Reserve Bank of India's regulations.
6. Application cum guarantee for stand by letter of credit should be obtained from the applicant.
7. Banks can consider obtaining a suitable indemnity/undertaking from the importer that all
remittances towards their import of goods as per the underlying contracts for which stand by
letter of credit is issued will be made only through the same branch which has issued the
credit.
8. The importer should give an undertaking that he shall not raise any dispute regarding the
payments made by the bank in standby letter of credit at any point of time howsoever, and will
be liable to the bank for all the amount paid therein. He importer should also indemnify the
bank from any loss, claim, counter claims, damages, etc. which the bank may incur on account
of making payment under the stand by letter of credit.
9. Presently, when the documentary letter of credit is established through swift, it is assumed
that the documentary letter of credit is subject to the provisions of UCPDC 500/600
Accordingly whenever standby letter of credit under ISP 98 is established through SWIFT, a
specific clause must appear that standby letter of credit is subject to the provision of ISP 98.
10. It should be ensured that the issuing bank, advising bank, nominated bank. etc, have all
subscribed to SP 98 in case stand by letter of credit is issued under ISP 98.
11. When payment under a stand by letter of credit is effected, the issuing bank to report such
invocation / payment to Reserve Bank of India.

Export Finance and Documentation.

 Introduction

 Air Waybill

 Bill of Lading

 Certificate of Origin
  Combined Transport Document

 Draft (or Bill of Exchange)

 Insurance Policy (or Certificate)

 Packing List/Specification

 Inspection Certificate 

Introduction

International market involves various types of trade documents that need to be produced while making
transactions. Each trade document is differ from other and present the various aspects of the trade
like description, quality, number, transportation medium, indemnity, inspection and so on. So, it
becomes important for the importers and exporters to make sure that their documents support the
guidelines as per international trade transactions. A small mistake could prove costly for any of the
parties.

For example, a trade document about the bill of lading is a proof that goods have been shipped on
board, while Inspection Certificate, certifies that the goods have been inspected and meet quality
standards. So, depending on these necessary documents, a seller can assure a buyer that he has
fulfilled his responsibility whilst the buyer is assured of his request being carried out by the seller.

The following is a list of documents often used in international trade:

 Air Waybill
 Bill of Lading
 Certificate of Origin
 Combined Transport Document
 Draft (or Bill of Exchange)
 Insurance Policy (or Certificate)
 Packing List/Specification
 Inspection Certificate

Air Waybills

Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample
consists of of three originals and nine copies. The first original is for the carrier and is signed by a
export agent; the second original, the consignee's copy, is signed by an export agent; the third original
is signed by the carrier and is handed to the export agent as a receipt for the goods.

Air Waybills serves as:

      •  Proof of receipt of the goods for shipment.

      •  An invoice for the freight.
      •  A certificate of insurance.
      •  A guide to airline staff for the handling, dispatch and delivery of the consignment.

The principal requirement for an air waybill are :

  The proper shipper and consignee must be mention.
 The airport of departure and destination must be mention.
 The goods description must be consistent with that shown on other documents.
 Any weight, measure or shipping marks must agree with those shown on other documents.
 It must be signed and dated by the actual carrier or by the named agent of a named carrier.
 It must mention whether freight has been paid or will be paid at the destination point.

Bill of Lading (B/L)

Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form
one destination to another and is signed by the representatives of the carrying vessel.

Bill of landing is issued in the set of two, three or more. The number in the set will be indicated on
each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure
that the document never comes into the hands of an unauthorised person.  Only one original is
sufficient to take possession of goods at port of discharge so, a bank which finances a trade transaction
will need to control the complete set. The bill of lading must be signed by the shipping company or its
agent, and must show how many signed originals were issued.

It will indicate whether cost of freight/ carriage has been paid or not : 

"Freight Prepaid" : Paid by shipper

"Freight collect" : To be paid by the buyer at the port of discharge

The bill of lading also forms the contract of carriage.

To be acceptable to the buyer, the B/L should :

 Carry an "On Board" notation to showing the actual date of shipment, (Sometimes however, the
"on board" wording is in small print at the bottom of the B/L, in which cases there is no need
for a dated "on board" notation to be shown separately with date and signature.)
 Be "clean" have no notation by the shipping company to the effect that goods/ packaging are
damaged.

The main parties involve in a bill of lading are:

 Shipper
o The person who send the goods.
 Consignee
o The person who take delivery of the goods.
 Notify Party
o The person, usually the importer, to whom the shipping company or its agent gives
notice of arrival of the goods.
 Carrier
o The person or company who has concluded a contract with the shipper for conveyance
of goods

The bill of lading must meet all the requirements of the credit as well as complying with UCP 500.
These are as follows :

 The correct shipper, consignee and notifying party must be shown.

 The carrying vessel and ports of the loading and discharge must be stated.
  The place of receipt and place of delivery must be stated, if different from port of loading or
port of discharge.
 The goods description must be consistent with that shown on other documents.
 Any weight or measures must agree with those shown on other documents.
 Shipping marks and numbers and /or container number must agree with those shown on other
documents.
 It must state whether freight has been paid or is payable at destination.
 It must be dated on or before the latest date for shipment specified in the credit.
 It must state the actual name of the carrier or be signed as agent for a named carrier.

Certificate of Origin

The Certificate of Origin is required by the custom authority of the importing country for the purpose
of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like
seal of the chamber, details of the good to be transported and so on.

The certificate must provide that the information required by the credit and be consistent with all
other document, It would normally include :

 The name of the company and address as exporter.

 The name of the importer.
 Package numbers, shipping marks and description of goods to agree with that on other
documents.
 Any weight or measurements must agree with those shown on other documents.
 It should be signed and stamped by the Chamber of Commerce.

Combined Transport Document

Combined Transport Document is also known as Multimodal Transport Document, and is used when
goods are transported using more than one mode of transportation. In the case of multimodal transport
document, the contract of carriage is meant for a combined transport from the place of shipping to the
place of delivery. It also evidence receipt of goods but it does not evidence on board shipment, if it
complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the
place of shipment and ends at the place of delivery. This documents need to be signed with
appropriate number of originals in the full set and proper evidence which indicates that transport
charges have been paid or will be paid at destination port.

Multimodal transport document would normally show :

 That the consignee and notify parties are as the credit.

 The place goods are received, or taken in charges, and place of final destination.
 Whether freight is prepaid or to be collected.
 The date of dispatch or taking in charge, and the "On Board" notation, if any must be dated and
signed.
 Total number of originals.
 Signature of the carrier, multimodal transport operator or their agents.

Commercial Invoice

Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or
import invoice, commercial invoice is finally used by the custom authorities of the importer's country
to evaluate the good for the purpose of taxation.
The invoice must :

 Be issued by the beneficiary named in the credit (the seller).

 Be address to the applicant of the credit (the buyer).
 Be signed by the beneficiary (if required).
 Include the description of the goods exactly as detailed in the credit.
 Be issued in the stated number of originals (which must be marked "Original) and copies.
 Include the price and unit prices if appropriate.
 State the price amount payable which must not exceed that stated in the credit
 include the shipping terms.

Bill of Exchange

A Bill of Exchange is a special type of written document under which an exporter ask importer a certain
amount of money in future and the importer also agrees to pay the importer that amount of money on
or before the future date. This document has special importance in wholesale trade where large
amount of money involved.

Following persons are involved in a bill of exchange:

      Drawer: The person who writes or prepares the bill.
      Drawee: The person who pays the bill.
      Payee: The person to whom the payment is to be made.
      Holder of the Bill: The person who is in possession of the bill.

On the basis of the due date there are two types of bill of exchange:

 Bill of Exchange after Date: In this case the due date is counted from the date of drawing and
is also called bill after date.
 Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance
of the bill and is also called bill of exchange after sight.

Insurance Certificate

Also known as Insurance Policy, it certifies that goods transported have been insured under an open
policy and is not actionable with little details about the risk covered.

It is necessary that the date on which the insurance becomes effective is same or earlier than the date
of issuance of the transport documents.

Also, if submitted under a LC, the insured amount must be in the same currency as the credit and
usually for the bill amount plus 10 per cent.

The requirements for completion of an insurance policy are as follow :

 The name of the party in the favor which the documents has been issued.
 The name of the vessel or flight details.
 The place from where insurance is to commerce typically the sellers warehouse or the port of
loading and the place where insurance cases usually the buyer's warehouse or the port of
destination.
 Insurance value that specified in the credit.
  Marks and numbers to agree with those on other documents.
 The description of the goods, which must be consistent with that in the credit and on the
invoice.
 The name and address of the claims settling agent together with the place where claims are
payable.
 Countersigned where necessary.
 Date of issue to be no later than the date of transport documents unless cover is shown to be
effective prior to that date.

Packing List  

Also known as packing specification, it contain details about the packing materials used in the shipping
of goods. It also include details like measurement and weight of goods.

The packing List must :

 Have a description of the goods ("A") consistent with the other documents.
 Have details of shipping marks ("B") and numbers consistent with other documents

Inspection Certificate

Certificate of Inspection is a document prepared on the request of seller when he wants the
consignment to be checked by a third party at the port of shipment before the goods are sealed for
final transportation.

In this process seller submit a valid Inspection Certificate along with the other trade documents like
invoice, packing list, shipping bill, bill of lading etc to the bank for negotiation.

On demand,  inspection can be done by various world renowned  inspection agencies on nominal

charges.

Export Pre Shipment and Post Shipment Finance.

 Types of Pre Shipment Finance

 Requirment for Getting Packing Credit
o Eligibility
o Quantum of Finance
 Different Stages of PreShipment Finance
o Appraisal and Sanction of Limits
 Disbursement of Packing Credit Advance
 Follow up of Packing Credit Advance
 Liquidation of Packing Credit Advance
 Overdue Packing
 Special Cases
 Packing Credit to Sub Supplier
 Running Account facility
 Preshipment Credit in Foreign Currency (PCFC)
  Packing Credit Facilities to deemed Exports
 Packing Credit facilities for Consulting Services
 Advance against Cheque / Drafts received as advance payment

Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods
before shipment. The main objectives behind preshipment finance or pre export finance is to enable
exporter to:

 Procure raw materials.

 Carry out manufacturing process.
 Provide a secure warehouse for goods and raw materials.
 Process and pack the goods.
 Ship the goods to the buyers.
 Meet other financial cost of the business.

Types of Pre Shipment Finance

 Packing Credit
 Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

 Packing Credit in Indian Rupee

 Packing Credit in Foreign Currency (PCFC)

Requirment for Getting Packing Credit

This facility is provided to an exporter who satisfies the following criteria

 A ten digit importerexporter code number allotted by DGFT.

 Exporter should not be in the caution list of RBI.
 If the goods to be exported are not under OGL (Open General Licence), the exporter should
have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following evidences to the
bank:

1. Formal application for release the packing credit with undertaking to the effect that the
exporter would be ship the goods within stipulated due date and submit the relevant shipping
documents to the banks within prescribed time limit.
2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the
exporter and the buyer.
3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized
category. If the item falls under quota system, proper quota allotment proof needs to be
submitted.

The confirmed order received from the overseas buyer should reveal the information about the full
name and address of the overseas buyer, description quantity and value of goods (FOB or CIF),
destination port and the last date of payment.
Eligibility

Pre shipment credit is only issued to that exporter who has the export order in his own name. However,
as an exception, financial institution can also grant credit to a third party manufacturer or supplier of
goods who does not have export orders in their own name.

In this case some of the responsibilities of meeting the export requirements have been out sourced to
them by the main exporter. In other cases where the export order is divided between two more than
two exporters, pre shipment credit can be shared between them

Quantum of Finance

The Quantum of Finance is granted to an exporter against the LC or an expected order.  The only
guideline principle is the concept of NeedBased Finance. Banks determine the percentage of margin,
depending on factors such as:

 The nature of Order.

 The nature of the commodity.
 The capability of exporter to bring in the requisite contribution.

Different Stages of Pre Shipment Finance

Appraisal and Sanction of Limits

1. Before making any an allowance for Credit facilities banks need to check the different aspects like
product profile, political and economic details about country. Apart from these things, the bank also
looks in to the status report of the prospective buyer, with whom the exporter proposes to do the
business. To check all these information, banks can seek the help of institution like ECGC or
International consulting agencies like Dun and Brad street etc.

The Bank extended the packing credit facilities after ensuring the following"

a. The exporter is a regular customer, a bona fide exporter and has a goods standing in the
market.
b. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or
not.
c. Whether the country with which the exporter wants to deal is under the list of Restricted Cover
Countries(RCC) or not.

Disbursement of Packing Credit Advance

2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed
the list of documents mentioned earlier or not. Disbursement is normally allowed when all the
documents are properly executed. 

Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in
these cases, the bank provide a special packing credit facility and is known as Running Account
Packing.
Before disbursing the bank specifically check for the following particulars in the submitted documents"

a. Name of buyer
b. Commodity to be exported
c. Quantity
d. Value (either CIF or FOB)
e. Last date of shipment / negotiation.
f. Any other terms to be complied with

The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of
goods, whichever is found to be lower. Normally insurance and freight charged are considered at a
later stage, when the goods are ready to be shipped.

In this case disbursals are made only in stages and if possible not in cash. The payments are made
directly to the supplier by drafts/bankers/cheques.

The bank decides the duration of packing credit depending upon the time required by the exporter for
processing of goods.

The maximum duration of packing credit period is 180 days, however bank may provide a further 90
days extension on its own discretion, without referring to RBI.

Follow up of Packing Credit Advance

3. Exporter needs to submit stock statement giving all the necessary information about the stocks. It is
then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides
the rate of submission of this stocks.

Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.

Liquidation of Packing Credit Advance

4. Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment,
thereby converting preshipment credit into postshipment credit.

This liquidation can also be done by the payment receivable from the Government of India and includes
the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or
from any other relevant source.

In case if the export does not take place then the entire advance can also be recovered at a certain
interest rate. RBI has allowed some flexibility in to this regulation under which substitution of
commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the
packing credit advance may be repaid by proceeds from export of the same or another commodity to
the same or another buyer. However, bank need to ensure that the substitution is commercially
necessary and unavoidable.

Overdue Packing

5. Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit
on the due date. And, if the condition persists then the bank takes the necessary step to recover its
dues as per normal recovery procedure.
Special Cases

Packing Credit to Sub Supplier

1. Packing Credit can only be shared on the basis of disclaimer between the Export Order Holder (EOH)
and the manufacturer of the goods. This disclaimer is normally issued by the EOH in order to indicate
that he is not availing any credit facility against the portion of the order transferred in the name of the
manufacturer.

This disclaimer is also signed by the bankers of EOH after which they have an option to open an inland
L/C specifying the goods to be supplied to the EOH as a part of the export transaction. On basis of such
an L/C, the subsupplier bank may grant a packing credit to the subsupplier to manufacture the
components required for exports.
On supply of goods, the L/C opening bank will pay to the sub supplier's bank against the inland
documents received on the basis of the inland L/C opened by them.

The final responsibility of EOH is to export the goods as per guidelines. Any delay in export order can
bring EOH to penal provisions that can be issued anytime.

The main objective of this method is to cover only the first stage of production cycles, and is not to be
extended to cover supplies of raw material etc. Running account facility is not granted to subsuppliers.

In case the EOH is a trading house, the facility is available commencing from the manufacturer to
whom the order has been passed by the trading house.

Banks however, ensure that there is no double financing and the total period of packing credit does not
exceed the actual cycle of production of the commodity. 

Running Account facility

2. It is a special facility under which a bank has right to grant preshipment advance for export to the
exporter of any origin. Sometimes banks also extent these facilities depending upon the good track
record of the exporter. 
In return the exporter needs to produce the letter of credit / firms export order within a given period
of time.

Preshipment Credit in Foreign Currency (PCFC)

3. Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC) with an
objective of making the credit available to the exporters at internationally competitive price. This is
considered as an added advantage under which credit is provided in foreign currency in order to
facilitate the purchase of raw material after fulfilling the basic export orders.

The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to
guidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the tax.

The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen
etc. However, the risk associated with the cross currency truncation is that of the exporter.

The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances
available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign
Currency Accounts RFC(D) and Foreign Currency(NonResident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow account and
Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account holders
for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the
account is not exceeded. In addition, Banks may arrange for borrowings from abroad. Banks may
negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the
prior approval of RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month
LIBOR.

Packing Credit Facilities to Deemed Exports

4. Deemed exports made to multilateral funds aided projects and programmes, under orders secured
through global tenders for which payments will be made in free foreign exchange, are eligible for
concessional rate of interest facility both at pre and post supply stages.

Packing Credit facilities for Consulting Services

5. In case of consultancy services, exports do not involve physical movement of goods out of Indian
Customs Territory. In such cases, Preshipment finance can be provided by the bank to allow the
exporter to mobilize resources like technical personnel and training them.

Advance against Cheque/Drafts received as advance payment

6. Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank
may grant export credit at concessional rate to the exporters of goods track record, till the time of
realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves
that the proceeds are against an export order.

Export Post Shipment Finance.

 Introduction

 Basic Features

 Financing For Various Types of Export Buyer's Credit

 Supplier's Credit

 Types of Post Shipment Finance

 Crystallization of Overdue Export Bills

Introduction
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller
against a shipment that has already been made. This type of export finance is granted from the date of
extending the credit after shipment of the goods to the realization date of the exporter proceeds.
Exporters don’t wait for the importer to deposit the funds.

Basic Features

The features of postshipment finance are:

 Purpose of Finance
Postshipment finance is meant to finance export sales receivable after the date of shipment of
goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended
to finance receivable against supplies made to designated agencies.
 Basis of Finance
Postshipment finances is provided against evidence of shipment of goods or supplies made to
the importer or seller or any other designated agency.
 Types of Finance

Postshipment finance can be secured or unsecured. Since the finance is extended against
evidence of export shipment and bank obtains the documents of title of goods, the finance is
normally self liquidating. In that case it involves advance against undrawn balance, and is usually
unsecured in nature.
Further, the finance is mostly a funded advance. In few cases, such as financing of project
exports, the issue of guarantee (retention money guarantees) is involved and the financing is
not funded in nature.

 Quantum of Finance
As a quantum of finance, postshipment finance can be extended up to 100% of the invoice
value of goods. In special cases, where the domestic value of the goods increases the value of
the exporter order, finance for a price difference can also be extended and the price
difference is covered by the government. This type of finance is not extended in case of
preshipment stage.
Banks can also finance undrawn balance. In such cases banks are free to stipulate margin
requirements as per their usual lending norm.
 Period of Finance
Postshipment finance can be off short terms or long term, depending on the payment terms
offered by the exporter to the overseas importer. In case of cash exports, the maximum period
allowed for realization of exports proceeds is six months from the date of shipment. Concessive
rate of interest is available for a highest period of 180 days, opening from the date of
surrender of documents. Usually, the documents need to be submitted within 21days from the
date of shipment.

Financing For Various Types of Export Buyer's Credit

Postshipment finance can be provided for three types of export :

 Physical exports: Finance is provided to the actual exporter or to the exporter in whose name
the trade documents are transferred.
 Deemed export: Finance is provided to the supplier of the goods which are supplied to the
designated agencies.
 Capital goods and project exports: Finance is sometimes extended in the name of overseas
buyer. The disbursal of money is directly made to the domestic exporter.
Supplier's Credit

Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale purchasing under
a contract. Once the bank approved loans to the buyer, the seller shoulders all or part of the interests
incurred. 

Types of Post Shipment Finance

The post shipment finance can be classified as :

1. Export Bills purchased/discounted.

2. Export Bills negotiated
3. Advance against export bills sent on collection basis.
4. Advance against export on consignment basis
5. Advance against undrawn balance on exports
6. Advance against claims of Duty Drawback.

1. Export Bills Purchased/ Discounted.(DP & DA Bills)

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by
the banks. It is used in indisputable international trade transactions and the proper limit has to be
sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is
further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn
security available in this method, banks often become ready to extend the finance against bills under
LC.

 However, this arises two major risk factors for the banks:

1. The risk of nonperformance by the exporter, when he is unable to meet his terms and
conditions. In this case, the issuing banks do not honor the letter of credit.
2. The bank also faces the documentary risk where the issuing bank refuses to honour its
commitment. So, it is important for the for the negotiating bank, and the lending bank to
properly check all the necessary documents before submission.

3. Advance Against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies.
Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening
of foreign currency. 
Banks may allow advance against these collection bills to an exporter with a concessional rates of
interest depending upon the transit period in case of DP Bills and transit period plus usance period in
case of usance bill.
The transit period is from the date of acceptance of the export documents at the banks branch for
collection and not from the date of advance.

4. Advance Against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the
exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust
receipt /undertaking to deliver the sale proceeds by specified date, which should be within the
prescribed date even if according to the practice in certain trades a bill for part of the estimated value
is drawn in advance against the exports.
In case of export through approved Indian owned warehouses abroad the times limit for realization is
15 months.

5. Advance against Undrawn Balance

It is a very common practice in export to leave small part undrawn for payment after adjustment due
to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn
balance is in conformity with the normal level of balance left undrawn in the particular line of export,
subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the
exporter that he will, within 6 months from due date of payment or the date of shipment of the goods,
whichever is earlier surrender balance proceeds of the shipment. 

6. Advance Against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is given
only, if the inhouse cost of production is higher in relation to international price. This type of financial
support helps the exporter to fight successfully in the international markets.

In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period
of 90 days. These are granted only if other types of export finance are also extended to the exporter
by the same bank.

After the shipment, the exporters lodge their claims, supported by the relevant documents to the
relevant government authorities. These claims are processed and eligible amount is disbursed after
making sure that the bank is authorized to receive the claim amount directly from the concerned
government authorities.

Crystallization of Overdue Export Bills

Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated
/discounted is not realize on due date. This conversion occurs on the 30th day after expiry of the NTP
in case of unpaid DP bills and on 30th day after national due date in case of DA bills, at prevailing TT
selling rate ruling on the day of crystallization, or the original bill buying rate, whichever is higher.

Foreifting and Factoring.

 Introduction

 Definition of Forfeiting

 How forfeiting Works in International Trade

  Documentary Requirements

 Forfeiting

 Benefits to Exporter

 Benefits to Banks

 Definition of Factoring

 Characteristics of Factoring

 Different Types of Factoring

Introduction

Forfeiting and factoring are services in international market given to an exporter or seller. Its main
objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and
factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a
shorttermed receivables (within 90 days) and is more related to receivables against commodity sales.

Definition of Forfeiting

The terms forfeiting is originated from a old French word ‘forfait’, which means to surrender ones right
on something to someone else. In international trade, forfeiting may be defined as the purchasing of an
exporter’s receivables at a discount price by paying cash. By buying these receivables, the forfeiter
frees the exporter from credit and the risk of not receiving the payment from the importer.

How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the
exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details
about the importer, and other necessary documents, forfeiter estimates risk involved in it and then
quotes the discount rate. 
The exporter then quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter.
Export takes place against documents guaranteed by the importer’s bank and discounts the bill with
the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the
following documents associated with an export transaction in the manner suggested below:

 Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead,
these could be built into the FOB price, stated on the invoice.
 Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the
other details, such FOB price, commission insurance, normally included in the "Analysis of
Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only
with reference to the FOB value of the exports stated on the shipping bill.
Forfeiting

The forfeiting typically involves the following cost elements:

1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to execute a
specific forfeiting transaction at a firm discount rate with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted
by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of
exchange.
 

Benefits to Exporter

 100 per cent financing : Without recourse and not occupying exporter's credit line That is to
say once the exporter obtains the financed fund, he will be exempted from the responsibility
to repay the debt.
 Improved cash flow : Receivables become current cash in flow and its is beneficial to the
exporters to improve financial status and liquidation ability so as to heighten further the funds
raising capability.
 Reduced administration cost : By using forfeiting , the exporter will spare from the
management of the receivables. The relative costs, as a result, are reduced greatly.
 Advance tax refund: Through forfeiting the exporter can make the verification of export and
get tax refund in advance just after financing.
 Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from
deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the
forfeiting bank.
 Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers
freely, and thus, be more competitive in the market.

Benefits to Banks

Forfeiting provides the banks following benefits:

 Banks can offer a novel product range to clients, which enable the client to gain 100% finance,
as against 8085% in case of other discounting products.
 Bank gain fee based income.
 Lower credit administration and credit follow up.

Definition of Factoring

Definition of factoring is very simple and can be defined as the conversion of credit sales into cash.
Here, a financial institution which is usually a bank buys the accounts receivable of a company usually
a client and then pays up to 80% of the amount immediately on agreement. The remaining amount is
paid to the client when the customer pays the debt. Examples includes factoring against goods
purchased, factoring against medical insurance, factoring for construction services etc.

Characteristics of Factoring
1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of offbalance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.
Different Types of Factoring
1. Disclosed 
2. Undisclosed

1. Disclosed Factoring
In disclosed factoring, client’s customers are aware of the factoring agreement. 
Disclosed factoring is of two types: 

Recourse factoring: The client collects the money from the customer but in case customer don’t pay
the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a
low rate of interest and is in very common use. 
Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts from the
customer. Balance amount is paid to client at the end of the credit period or when the customer pays
the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring
will eliminate the need for credit and collection departments in the organization.

2. Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case,
Client has to pay the amount to the factor irrespective of whether customer has paid or not.

Export Bank Guarantees.

 Introduction

 Benefits of Bank Guarantees

 Types of Bank Guarantees

 How to Apply for Bank Guarantee

 Bank Guarantees vs. Letters of Credit

Introduction

A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this
guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the
customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for
issuing the guarantee. 

Any one can apply for a bank guarantee, if his or her company has obligations towards a third party for
which funds need to be blocked in order to guarantee that his or her company fulfils its obligations (for
example carrying out certain works, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank guarantee remains valid
until the customer dully releases the bank from its liability.

In the situations, where a customer fails to pay the money, the bank must pay the amount within three
working days. This payment can also be refused by the bank, if the claim is found to be unlawful.
Benefits of Bank Guarantees

For Governments
1. Increases the rate of private financing for key sectors such as infrastructure.
2. Provides access to capital markets as well as commercial banks.
3. Reduces cost of private financing to affordable levels.
4. Facilitates privatizations and public private partnerships.
5. Reduces government risk exposure by passing commercial risk to the private sector.

For Private Sector

1. Reduces risk of private transactions in emerging countries.
2. Mitigates risks that the private sector does not control.
3. Opens new markets.
4. Improves project sustainability.

Legal Requirements

Bank guarantee is issued by the authorised dealers under their obligated authorities notified vide FEMA
8/ 2000 dt 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000 or more need to be
reported to Reserve Bank of India (RBI).

Types of Bank Guarantees

 1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect.

Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly to the guarantee's
beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is
also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned
in the guarantee documents.

Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is basically a
representative of the issuing bank in the country to which beneficiary belongs. This involvement of a
second bank is done on the demand of the beneficiary. This type of bank guarantee is more time
consuming and expensive too.

2. Confirmed Guarantee 
It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued
directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm
the original documents and thereby assume the responsibility.

3. Tender Bond
This is also called bid bonds and is normally issued in support of a tender in international trade. It
provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of the tender
conditions.

4. Performance Bonds
This is one of the most common types of bank guarantee which is used to secure the completion of the
contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier
in case of nondelivery of goods. 

5. Advance Payment Guarantees

This mode of guarantee is used where the applicant calls for the provision of a sum of money at an
early stage of the contract and can recover the amount paid in advance, or a part thereof, if the
applicant fails to fulfill the agreement.

6. Payment Guarantees 
This type of bank guarantee is used to secure the responsibilities to pay goods and services. If the
beneficiary has fulfilled his contractual obligations after delivering the goods or services but the debtor
fails to make the payment, then after written declaration the beneficiary can easily obtain his money
form the guaranteeing bank.

7. Loan Repayment Guarantees

This type of guarantee is given by a bank to the creditor to pay the amount of loan body and interests
in case of nonfulfillment by the borrower. 

8. B/L Letter of Indemnity

This is also called a letter of indemnity and is a type of guarantee from the bank making sure that any
kind of loss of goods will not be suffered by the carrier. 

9. Rental Guarantee
This type of bank guarantee is given under a rental contract. Rental guarantee is either limited to
rental payments only or includes all payments due under the rental contract including cost of repair on
termination of the rental contract.

10. Credit Card Guarantee

Credit card guarantee is issued by the credit card companies to its customer as a guarantee that the
merchant will be paid on transactions regardless of whether the consumer pays their credit.

How to Apply for Bank Guarantee

Procedure for Bank Guarantees are very simple and are not governed by any particular legal
regulations. However, to obtained the bank guarantee one need to have a current account in the
bank.  Guarantees can be issued by a bank through its authorised dealers as per notifications
mentioned in the FEMA 8/2000 date 3rd May 2000. Only in case of revocation of guarantee involving US
$ 5000/ or more to be reported to Reserve Bank of India along with the details of the claim received.

Bank Guarantees vs. Letters of Credit

A bank guarantee is frequently confused with letter of credit (LC), which is similar in many ways but
not the same thing. The basic difference between the two is that of the parties involved. In a bank
guarantee, three parties are involved; the bank, the person to whom the guarantee is given and the
person on whose behalf the bank is giving guarantee. In case of a letter of credit, there are normally
four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary
(exporter).

Also, as a bank guarantee only becomes active when the customer fails to pay the necessary amount
where as in case of letters of credit, the issuing bank does not wait for the buyer to default, and for
the seller to invoke the undertaking.

Export International Trade Transport Risk.

 
  Introduction
 Transport Insurance
 Scope of Coverage
 Specialist Covers
 Seller's Buyer's Contingent Interest Insurance
 Loss of Profits/ Consequential Loss Insurance

Introduction

It is quite important to evaluate the transportation risk in international trade for better
financial stability of export business. About 80% of the world major transportation of goods is
carried out by sea, which also gives rise to a number of risk factors associated with
transportation of goods.  
The major risk factors related to shipping are cargo, vessels, people and financing. So it
becomes necessary for the government to address all of these risks with broadbased security
policy responses, since simply responding to threats in isolation to one another can be both
ineffective and costly.

While handling transportation in international trade following precaution should be taken into
consideration.

 In case of transportation by ship, and the product should be appropriate for

containerization. It is worth promoting standard order values equivalent to quantities
loaded into standard size containers.
 Work must be carried out in compliance with the international code concerning the
transport of dangerous goods.
 For better communication purpose people involve in the handling of goods should be
equipped with phone, fax, email, internet and radio.
 About the instructions given to the transport company on freight forwarder.
 Necessary information about the cargo insurance.
 Each time goods are handled; there risk of damage. Plan for this when packing for
export, and deciding on choice of transport and route.
 The expected sailing dates for marine transport should be built into the production
programme, especially where payments is to be made by Letter of Credit when
documents will needs to be presented within a specified time frame.
 Choice of transport has Balance Sheet implications. The exporter is likely to received
payments for goods supplied while they are in transit.
 Driver accompanied road transport provides peace of minds, but the ability to fill the
return load will affect pricing.

Transport Insurance

Export and import in international trade, requires transportation of goods over a long distance. No
matter whichever transport has been used in international trade, necessary insurance is must for ever
good.

Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage or
loss of goods during transportation. Cargo insurance is effective in all the three cases whether the
goods have been transported via sea, land or air.

Insurance policy is not applicable if the goods have been found to be packaged or transported by any
wrong means or methods. So, it is advisable to use a broker for placing cargo risks.
Scope of Coverage

The following can be covered for the risk of loss or damage:

 Cargoimport, export cross voyage dispatched by sea, river, road, rail post, personal courier,
and including associated storage risks.
 Good in transit (inland).
 Freight service liability.
 Associated stock.

However there are still a number of general exclusion such loss by delay, war risk, improper packaging
and insolvency of carrier. Converse for some of these may be negotiated with the insurance company.
The Institute War Clauses may also be added.

Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated
when eligible shipments are made. Individual insurance certificates are issued after the shipment is
made. Some letters of Credit Will require an individual insurance policy to be issued for the shipment,
While others accept an insurance certificate.

Specialist Covers

Whereas standard marine/transport cover is the answer for general cargo, some classes of business will
have special requirements. General insurer may have developed specialty teams to cater for the needs
of these business, and it is worth asking if this cover can be extended to export risks.

Cover may be automatically available for the needs of the trade.

Example of this are:

 Project Constructional works insurers can cover the movement of goods for the project.
 Fine art
 Precious stonesSpecial Cover can be extended to cover sending of precious stones.
 Stock through put cover extended beyond the time goods are in transit until when they are
used at the destination.

Seller's Buyer's Contingent Interest Insurance

An exporter selling on, for example FOB (INCOTERMS 2000) delivery terms would according to the
contract and to INCOTERMS, have not responsibility for insurance once the goods have passed the ship's
rail. However, for peace of mind, he may wish to purchase extra cover, which will cover him for loss or
will make up cover where the other policy is too restrictive . This is known as Seller's Interest
Insurance. 

Similarly, cover is available to importers/buyers.

Seller's Interest and Buyer's Interest covers usually extended cover to apply if the title in the goods
reverts to the insured party until the goods are recovered resold or returned.

Loss of Profits/ Consequential Loss Insurance

Importers buying goods for a particular event may be interested in consequential loss cover in case the
goods are late (for a reason that id insured) and (expensive) replacements have to be found to replace
them. In such cases, the insurer will pay a claim and receive may proceeds from the eventual sale of
the delayed goods.

Credit Risk in Export Business.

 Introdcution
 Credit Insurance
 Payment Risk
 Bad Debt Protection
 Confirmation of LC
 Factoring and Forfeiting
 Credit Limit
 Benefits of Credit Cover

Introduction

Contract risk and credit risk are the part of international trade finance and are quite different from
each other.

A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers
directly to the goods being purchase under contract, whether it's a car, house land or whatever.

On the other hand a credit risk may be defined as the risk that a counter party to a transaction will fail
to perform according to the terms and conditions of the contract, thus causing the holder of the claim
to suffer a loss.

Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade
financing, foreign exchange, swaps, bonds, equities, and inter bank transactions.  

Credit Insurance

 Credit Insurance is special type of loan which pays back a fraction or whole of the amount to the
borrower in case of death, disability, or unemployment. It protects open account sales against
nonpayment resulting from a customer's legal insolvency or default. It is usually required by
manufacturers and wholesalers selling products on credit terms to domestic and/or foreign customers.

Benefits of Credit Insurance 

1. Expand sales to existing customers without increased risk. 

2 Offer more competitive credit terms to new customers in new markets. 
3. Help protect against potential restatement of earnings. 
4. Optimize bank financing by insuring trade receivables. 
5. Supplement credit risk management. 

Payment Risk
This type of risk arises when a customer charges in an organization or if he does not pay for operational
reasons. Payment risk can only be recovered by a well written contract. Recovery can not be made for
payment risk using credit insurance. 

Bad Debt Protection

A bad debt can effect profitability. So, it is always good to keep options ready for bad debt like
Confirmation of LC, debt purchase (factoring without recourse of forfeiting) or credit insurance.

Confirmation of LC

In an international trade, the confirmation of letter of credit is issued to an exporter or seller. This
confirmation letter assures payment to an exporter or seller, even if the issuing bank defaults on its
payment once the beneficiary meets his terms and conditions.

Factoring and Forfaiting

Where debt purchase is without recourse, the bank will already have advanced the funds in the debt
purchase transaction. The bank takes the risk of nonpayment.

Credit Limit

Companies with credit insurance need to have proper credit limits according to the terms and
conditions. This includes fulfilling the administrative requirements, including notification of overdoes
and also terms set out in the credit limit decision.

Payment of the claim can only be done after a fix period, which is about 6 months for slow pay
insurance. In case of economic and political events is six or more than six months, depending on the
exporter markets.

Credit insurance covers the risk of non payment of trade debts. Each policy is different, some covering
only insolvency risk on goods delivered, and others covering a wide range of risk such as :

 Local sales, export sales, or both.

 Protracted default.
 Political risk, including contract frustration, war transfer.
 Predelivery risks.
 Cover for sales from stock.
 Non honoring of letters of credits.
 Bond unfair calling risks.

Like all other insurance, credit insurance covers the risk of fortuitous loss. Key features of credit
insurance are:

 The company is expected to assess that its client exists and is creditworthy . This might be by
using a credit limit service provided by the insurer. A Credit limit Will to pay attention to the
company's credit management procedures, and require that agreed procedures manuals be
followed at all times.
 While the credit insurer underwrites the risk of non payment and contract frustration the
nature of the risk is affected by how it is managed. The credit insurer is likely to pay attention
to the company's credit managements procedures, and require that agreed procedures manuals
be followed at all times.
  The credit insurer will expect the sales contract to be written effectively and invoices to be
clear.
 The company will be required to report any overdue or other problems in a timely fashion.
 The credit insurer may have other exposure on the same buyers or in the same markets. A
company will therefore benefits if other policyholder report that a particular potential
customer is in financial difficulties.
 In the event that the customer does not pay, or cannot pay, the policy reacts. There may be a
waiting period to allow the company to start collection procedures, and to resolve nay quality
disputes.
 Many credit insurer contribute to legal costs, including where early action produces a full
recovery and avoids a claim.

Benefits of Credit Cover

 Protection for the debtor asset or the balance sheet.

 Possible access to information on credit rating of foreign buyer.
 Access to trade finance
 Protection of profit margin
 Advice on customers and levels of credit.
 Disciplined credit management.
 Assistance and /or advice when debts are overdue or there is a risk of loss.
 Provides confidence to suppliers, lenders and investors.
 Good corporate governance.

Country Political Risk in Export.

 Introduction
 Measuring Country Risk
 Political Risk
 PreDelivery Risks
 Pre Delivery Cover
 Binding contracts cover and noncancelable limits

Introduction

Country risk includes a wide range of risks, associated with lending or depositing funds, or doing other
financial transaction in a particular country. It includes economic risk, political risk, currency blockage,
expropriation, and inadequate access to hard currencies. Country risk can adversely affect operating
profits as well as the value of assets.

With more investors investing internationally, both directly and indirectly, the political, and therefore
economic, stability and viability of a country's economy need to be considered.

Measuring Country Risk

Given below are the lists of some agencies that provide services in evaluating the country risk.
  Bank of America World Information Services
 Business Environment Risk Intelligence (BERI) S.A.
 Control Risks Information Services (CRIS)
 Economist Intelligence Unit (EIU)
 Euromoney
 Institutional Investor
 Standard and Poor's Rating Group
 Political Risk Services: International Country Risk Guide (ICRG)
 Political Risk Services: CoplinO'Leary Rating System
 Moody's Investor Services

Political Risk

The risk of loss due to political reasons arises in a particular country due to changes in the country's
political structure or policies, such as tax laws, tariffs, expropriation of assets, or restriction in
repatriation of profits. Political risk is distinct from other commercial risks, and tends to be difficult to
evaluate.

 Some example of political risks are:

 Contract frustration by another country, government resulting in your inability to perform the
contract, following which the buyer may not make payment and or / on demand bonds may be
called.
 Government buyer repudiating the contract this may be occur if there is a significant political
or economic change within the customer's country.
 Licence cancellation or non renewal or imposition of an embargo.
 Sanctions imposed against a particular country or company.
 Imposition of exchange controls causing payments to be blocked.
 General moratorium decreed by an overseas government preventing payment
 Shortage of foreign exchange/transfer delay.
 War involving either importing or exporting country.
 Forced abandonment
 Revoking of Import/ Exports licence.
 Changes in regulations.

The following are also considered as political risks in relation to exporting :

 Confiscation of assets by a foreign government.

 Unfair calling of bonds.

Insurance companies provide political risk covers. These may be purchased:

 On their own, covering only political risk on the sale to a particular country.
 For a portfolio of political risks.
 For the political risks in relation to the sale to another company in your group (where there is a
common shareholding and therefore insolvency cover is not available).
 As part of a credit insurance policy.

PreDelivery Risks
A company can suffer financial loss, if export contract is cancelled due to commercial or political
reasons, even before the goods and services are dispatched or delivered. In such a situation, the
exposure to loss will depends on:

 The nature of the contract.

 If the company can salvage any products and resell them quickly, with a small amount of re
working
 Any stage payments
 If servicing staff have left the country.
 The extent of the commitments to suppliers.
 The horizon of pre delivery risk
 The customer and country risks

Pre Delivery Cover

Credit insurance can be extended to cover predelivery risk, in particular, the risk of customer
insolvency predelivery or political frustration predelivery.

Some times predelivery cover can be extended included the frustration of a contract caused by non
payment of a pre delivery milestone, and or non payment of a termination account, and or bond call.

Predelivery risks are often complicated and the wording of the cover is worth careful examination.

It is to be noted that in the event that it was clearly unwise to dispatch goods, credit risk (payment
risk) cover would not automatically apply if the company nonetheless went ahead and dispatched head
them.

Binding contracts cover and NonCancelable Limits

Binding contracts cover and noncancelable limits are not included in predelivery cover. However, they
provide a commitment from the credit insurer that the cover for dispatches / invoices will not be
withdrawn without a prior notice.

If the company's customer is overdue, or it is imprudent to dispatch, there is no credit insurance cover
for dispatches subsequently made, even where the company holds binding contract cover or
noncancelable limits.

Currency Risk in Export International Trade.

 Introduction
 Currency Hedging
 FOREX Market
 Spot Rate
 Forward Price
 Forward Price vs. Spot Price
 RBI Reference Rate
 Inter Bank Rates
  Telegraphic Transfer
 Currency Rate
 Cross Rate
 Long and Short
 Bid and Ask
 Buying and Selling
 FOREX Rates vs. Interest Rates
 Calculating the Forward Rates

Introduction

Currency risk is a type of risk in international trade that arises from the fluctuation in price of one
currency against another. This is a permanent risk that will remain as long as currencies remain the
medium of exchange for commercial transactions. Market fluctuations of relative currency values will
continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the
speculator, and the policy maker alike. 

While doing business in foreign currency, a contract is signed and the company quotes a price for the
goods using a reasonable exchange rate. However, economic events may upset even the best laid
plans. Therefore, the company would ideally wish to have a strategy for dealing with exchange rate
risk.

Currency Hedging

Currency hedging is technique used to avoid the risks associated with the changing value of currency
while doing transactions in international trade. It is possible to take steps to hedge foreign currency
risk. This may be done through one of the following options:

 Billing foreign deals in Indian Rupees: This insulates the Indian exporter from currency
fluctuations. However, this may not be acceptable to the foreign buyer. Most of international
trade transactions take place in one of the major foreign currencies USD, Euro, Pounds
Sterling, and Yen.
 Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into
your currency) at a future date, allowing for the risk that the buyer’s payments are late.
 Options: You buy the right to have currency at an agreed rate within an agreed period. For
example, if you expect to receive $35,000 in 3 months, time you could buy an option to
convert $35,000 into your currency in 3 months. Options can be more expensive than a forward
contract, but you don't need to compulsorily use your option.
 Foreign currency bank account and foreign currency borrowing: These may be suitable where
you have cost in the foreign currency or in a currency whose exchange rate is related to that
currency.

FOREX Market

Forex market is one of the largest financial markets in the world, where buyers and sellers conduct
foreign exchange transactions. Its important in the international trade can be estimated with the fact
that average daily trade in the global forex markets is over US $ 3 trillion. We shall touch upon some
important topics that affect the risk profile of an International transaction.

Spot Rate

Also known as "benchmark rates", "straightforward rates"or "outright rates", spot rates is an agreement
to buy or sell currency at the current exchange rate. The globally accepted settlementcycle for
foreignexchange contracts is two days. Foreignexchange contracts are therefore settled on the second
day after the day the deal is made.

Forward Price

Forward price is a fixed price at which a particular amount of a commodity, currency or security is to
be delivered on a fixed date in the future, possibly as for as a year ahead. Traders agree to buy and
sell currencies for settlement at least three days later, at predetermined exchange rates. This type of
transaction often is used by business to reduce their exchange rate risk.

Forward Price vs. Spot Price

Theoretically it is possible for a forward price of a currency to equal its spot price However, interest
rates must be considered . The interest rate can be earned by holding different currencies usually
varies, therefore forward price can be higher or lower than (at premium or discount to ) the spot
prices.

RBI Reference Rate

There reference rate given by RBI is based on 12 noon rates of a few selected banks in Mumbai.

Inter Bank Rates

Interbank rates rates quotes the bank for buying and selling foreign currency in the inter bank market,
which works on wafer thin margins . For inter bank transactions the quotation is up to four decimals
with the last two digits in multiples of 25.

Telegraphic Transfer

Telegraphic transfer or in short TT is a quick method of transfer money from one bank to another bank.
TT method of money transfer has been introduced to solve the delay problems caused by cheques or
demand drafts. In this method, money does not move physically and order to pay is wired to an
institutions’ casher to make payment to a company or individual. A cipher code is appended to the text
of the message to ensure its integrity and authenticity during transit. The same principle applies
withWestern Union and Money Gram.

Currency Rate

The Currency rate is the rate at which the authorized dealer buys and sells the currency notes to its
customers. It depends on the TC rate and is more than the TC rate for the person who is buying them.

Cross Rate

In inter bank transactions all currencies are normally traded against the US dollar, which becomes a
frame of reference. So if one is buying with rupees a currency X which is not normally traded, one can
arrive at a rupeeexchange rate by relating the rupee $ rate to the $X rate . This is known as a cross
rate.

Long and Short

When you go long on a currency, its means you bought it and are holding it in the expectation that it
will appreciate in value. By contrast, going short means you reselling currency in the expectation that
what you are selling will depreciate in value.

Bid and Ask

Bids are the highest price that the seller is offering for the particular currency. On the other hand, ask
is the lowest price acceptable to the buyer.Together, the two prices constitute a quotation and the
difference between the price offered by a dealer willing to sell something and the price he is willing to
pay to buy it back.

The bidask spread is amount by which the ask price exceeds the bid. This is essentially the difference
in price between the highest price thata buyer is willing to pay for an asset and the lowest price for
whicha seller is willing to sell it.

For example, if the bid price is $20 and the ask price is $21 then the "bidask spread" is $1.

The spread is usually rates as percentage cost of transacting in the forex market, which is computed as
follow : 

Percent spread =(Ask priceBid price)/Ask price *100

The main advantage of bid and ask methods is that conditions are laid out in advance and transactions
can proceed with no further permission or authorization from any participants. When any bid and ask
pair are compatible, a transaction occurs, in most cases automatically.

Buying and Selling

In terms of foreign exchange, buying means purchasing a certain amount of the foreign currency at the
bid or buying price against the delivery /crediting of a second currency which is also called counter
currency.

On the other hand, selling refers to a fix amount of foreign currency at the offered or selling price
against the receipt / debiting of another currency.

FOREX Rates vs. Interest Rates

Forex rates or exchange rate is the price of a country's currency in terms of another country's currency.
It specifies how much one currency is worth in terms of the other. For example a forex rate of 123
Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD
1.

Choice of currency and its interest rate is a major concern in the international trade. Investors are
easily attracted by the higher interest rates which in turns also effects the economy of a nation and its
currency value.

For an example, if interest rate on INR were substantially higher than the interest rate on USD, more
USD would be converted into INR and pumped into the Indian economic system. This would result in
appreciation of the INR, resulting in lower conversion rates of USD against INR, at the time of
reconversion into USD.

Calculating the Forward Rates

A forward rate is calculated by calculating the interest rate difference between the two currencies
involved in the transactions. For example, if a client is buying a 30 days US dollar then, the difference
between the spot rate and the forward rate will be calculated as follow: 

The US dollars are purchased on the spot market at an appropriate rate, what causes the forward
contract rate to be higher or lower is the difference in the interest rates between India and the United
States.

The interest rate earned on US dollars is less than the interest rate earned on Indian Rupee (INR).
Therefore, when the forward rates are calculated the cost of this interest rate differential is added to
the transaction through increasing the rate.

USD 100,000 X 1.5200 = INR 152,000

INR 152,000 X 1% divided by 12 months = INR 126.67
INR 152,000 + INR 126.67 = INR 152,126.67
INR 152,126.67/USD 100,000 = 1.5213

Foreign Exchange Management Act (FEMA) for Export Import Foreign

Exchange.

 Introduction
 Some Highlights of FEMA
 Buyers's /Supplier's Credit

Introduction

Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free
flow of foreign exchange in India. It has brought a new management regime of foreign exchange
consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange
Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found
to be unsuccessful with the proliberalisation policies of the Government of India.

FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it
belongs to a person who is a resident of India.

Some Highlights of FEMA

 It prohibits foreign exchange dealing undertaken other than an authorised person;

 It also makes it clear that if any person residing in India, received any Forex payment (without
there being a corresponding inward remittance from abroad) the concerned person shall be
deemed to have received they payment from a nonauthorised person.
 There are 7 types of current account transactions, which are totally prohibited, and therefore
no transaction can be undertaken relating to them. These include transaction relating to
lotteries, football pools, banned magazines and a few others.
 FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or
transfer any foreign security or immovable property situated outside India.
 Similar freedom is also given to a resident who inherits such security or immovable property
from an ROI.
  An ROI is permitted to hold shares, securities and properties acquired by him while he was a
Resident or inherited such properties from a Resident.
 The exchange drawn can also be used for purpose other than for which it is drawn provided
drawl of exchange is otherwise permitted for such purpose.
 Certain prescribed limits have been substantially enhanced. For instance, residence now going
abroad for business purpose or for participating in conferences seminars will not need the RBI's
permission to avail foreign exchange up to US$. 25,000 per trip irrespective of the period of
stay, basic travel quota has been increased from the existing US$ 3,000 to US$ 5,000 per
calendar year.

Buyers's /Supplier's Credit

Trade Credit have been subjected to dynamic regulation over a period of last two years. Now, Reserve
Bank of India (RBI) vide circular number A.P. (DIR Series) Circular No. 24, Dated November 1, 2004, has
given general permission to ADs for issuance of Guarantee/ Letter of Undertaking (LoU) / Letter of
Comfort (LoC) subject to certain terms and conditions . In view of the above, we are issuing
consolidated guidelines and process flow for availing trade credit .

1. Definition of Trade Credit : Credit extended for imports of goods directly by the overseas
supplier, bank and financial institution for original maturity of less than three years from the
date of shipment is referred to as trade credit for imports.
Depending on the source of finance, such trade credit will include supplier's credit or buyers
credit , Supplier 's credit relates to credit for imports into India extended by the overseas
supplier , while Buyers credit refers to loans for payment of imports in to India arranged by the
importer from a bank or financial institution outside India for maturity of less than three years.

It may be noted that buyers credit and suppliers credit for three years and above come under
the category of External Commercial Borrowing (ECB), which are governed by ECB guidelines.
Trade credit can be availed for import of goods only therefore interest and other charges will
not be a part of trade credit at any point of time.
2. Amount and tenor : For import of all items permissible under the Foreign Trade Policy (except
gold), Authorized Dealers (ADs) have been permitted to approved trade credits up to 20
millions per import transaction with a maturity period ( from the date of shipment) up to one
year.

Additionally, for import of capital goods, ADs have been permitted to approved trade credits
up to USD 20 millions transactions with a maturity period of more than one year and less than
three years. No roll over/ extension will be permitted by the AD beyond the permissible period.
3. All in cost ceiling : The all in cost ceiling are as under: Maturity period up to one year  6
months LIBOR +50 basis points.

Maturity period more than one year but less than three years 6 months LIBOR* + 125 basis point
* for the respective currency of credit or applicable benchmark like EURIBOR., SIBOR, TIBOR,
etc.
4. Issue of guarantee, letter of undertaking or letter of comfort in favour of overseas lender : RBI
has given general permission to ADs for issuance of guarantee / Letter of Undertaking (LOU) /
Letter of Comfort (LOC) in favour of overseas supplier, bank and financial instruction, up to
USD 20 millions per transaction for a period up to one year for import of all non capital goods
permissible under Foreign Trade Policy (except gold) and up to three years for import of capital
goods.

In case the request for trade credit does not comply with any of the RBI stipulations, the
importer needs to have approval from the central office of RBI.
 FEMA regulations have an immense impact in international trade transactions and different
modes of payments.RBI release regular notifications and circulars, outlining its clarifications
and modifications related to various sections of FEMA.

FEDAI Guidelines for Foreign Exchange.

Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that
deals in foreign exchange inIndia as a self regulatory body under the Section 25 of the Indian Company
Act (1956).

The role and responsibilities of FEDAI are as follows:

 Formulations of FEDAI guidelines and FEDAI rules for Forex business.

 Training of bank personnel in the areas of Foreign Exchange Business.
 Accreditation of Forex Brokers.
 Advising/Assisting member banks in settling issues/matters in their dealings.
 Represent member banks on Government/Reserve Bank of India and other bodies.
 Rules of FEDAI also include announcement of daily and periodical rates to its member banks.

FEDAI guidelines play an important role in the functioning of the markets and work in close
coordination with Reserve Bank of India (RBI), other organizations like Fixed Income Money Market and
Derivatives Association  (FIMMDA), the Forex Association of India and various other market participants.

Web References

http://business.gov.in

http://www.taxguru.in/fema/summary-of-foreign-trade-policy-2009-14-it-exemption-us-10a0-and-10b-
extended-till-march-2011.html

http://business.gov.in/trade/trade_stat.php