ROLE OF BANKS IN FOREIGN TRADE (CORRESPONDENT RELATIONSHIP) Under correspondent relationship one bank operates as an agent of another in places wherever possible. The following services are provided by banks to settle international transactions: a) Collection of cheques, drafts, bills, etc. b) Issue of demand drafts, mail transfers, travelers cheques etc. c) Arrangements for reimbursement on letters l etters of credit. d) Advising, confirming, amending letters of credit. e) Sale and purchase of foreign currencies. f) Issue and confirming guarantees. g) Granting and guaranteeing loans & overdrafts. h) Furnishing of credit information.
TYPES OF BANKS 1. Issuing 1. Issuing Bank – Bank – This bank is primarily responsible for the payment under the credit to the beneficiary, i.e., exporter. Bank – A credit may be advised to the 2. Advising 2. Advising Bank – beneficiary through another bank about the authenticity of credit. However, the bank is not responsible for making the payment. Bank – The bank is located in the 3. Confirming Bank – exporter’s country but it carries the responsibility of
making payment under the credit like an issuing bank. 4. Reimbursing Bank – The issuing bank may indicate in the letter of credit the name of a bank from whom the paying/negotiating bank can obtain reimbursement. PRE-SHIPMENT CREDIT OR PACKING CREDIT
1. DEFINITION – The loan or advance is granted to an exporter for financing the purchase of material, processing, manufacturing or packing of goods, etc. meant for export. It is a kind of working capital. 2. ELIGIBILITY – The exporter gets credit on the strength of: i) Letter of credit ii) Confirmed export order iii) Documentary proof of communication related to the confirmation of the export order ( Fax, Telex, Cable, etc.) 3. TYPE OF ACCOUNT – The exporter has to maintain a separate loan account for each export order. Running account facility may also be granted by a bank to exporter with a good track record as EOU, EPZ, SEZ, industrial unit. 4. PERIOD OF LOAN – Loan is normally granted for a period not exceeding 180 days. However, it
could be extended up to 270 days at a concessional rate of interest. 5. RATE OF INTEREST: i) Up to 180 days Not exceeding PLR minus 2.5 per cent ii) Over 180 days and PLR plus 0.5 percent up to 270 days ii) Beyond 270 days Bank has discretionary up to 360 days power to charge any interest. 6. QUANTUM OF FINANCE – The amount of loan should not exceed (i) The FOB price, or (ii) Domestic Cost of production (whichever is less). Advance exceeding FOB value but up to domestic cost of production may be considered in the following cases: a) The commodity is eligible for duty draw-back . b) Export of HPS groundnuts and de-oiled cakes. c) Agro-based products. d) Wastage involved in the processing of agroproducts. 7. MARGIN REQUIREMENTS – Normally the banks insist on the margin money from the borrower while granting a loan. This is the minimum contribution that a borrower has to make for availing the loan facility. However, there are no fixed norms prescribed by banks for the margin money.
APPRAISAL OF LOAN BY THE BANK (Precautions taken for processing loan application) a) The applicant should have IECN. b) Exported goods are not banned for export. c) Exporter’s name does not figure in the caution list of the RBI. d) Application supported by letter of credit/ confirmed export order. e) The goods exported should not be under economic or political stress. DOCUMENTATION FORMALITIES a) Export credit agreement. b) Hypothecation/ Pledge agreement. c) Corporate guarantees from directors/ partners. d) Insurance policy to cover stocks. e) Necessary undertaking for the payment of insurance premium. f) Formalities related with the registration charges, wherever necessary. g) Other documents as specified by the bank. ECGC FORMALITIES Bank should get the requisite guarantee from Export Credit and Guarantee Corporation(ECGC) or Whole Turnover Packing Credit Guarantee(WTPCG). CERTAIN SPECIFIC CASES 1. Sharing of Packing Credit with Manufacturers. A merchant exporter or an Export House is allowed
to share the packing credit facility with its supporting manufacturer of the good. 2. Sharing of Packing Credit with Sub- suppliers. Packing credit may be offered to the sub-suppliers of raw materials, components, etc. of exported goods on the basis of intent letter of credit opened in favour of the suppliers by the exporter. The scheme covers only rupee packing credit. The advance granted to the sub-supplier will be a part of the total packing credit granted to an exporter. 3. Packing Credit for Deemed Exports. Deemed exporters are those firms which offer supplies to EOU, EPZ, SEZ industrial units or the projects funded by the international institutions. Deemed exporters can also avail packing credit facility. 4. Packing Credit for Consultancy Services. 5. Packing Credit for Construction Contractors. 6. Packing Credit for the Exports of IT Services and Software. 7. Packing Credit for floriculture and other Agrobased products. 8. Packing Credit for Processors/Exporters in Agri-export Zones. 9. Advance Payment to Exporters In case an exporter receives payment by means of cheques, drafts (direct remittance), he may be granted
advance at concessional rate of interest. Exporters with good track record are also eligible for advance payment. PACKING CREDIT IN FOREIGN CURRENCY Exporters may get packing credit in foreign currency (convertible currency) at a concessional rate not exceeding 6.75% up to 160 days LIBOR(London Inter-bank Offer Rate) and for credit over 160 days at 2.75% over LIBOR. The bank may use the balance available in EEFC Account, FNCR (B) Account of the exporter for granting(PCFC). It is self-liquidating in nature and will be adjusted by discounting the related export bill designated in foreign currency. It reduces the risk of fluctuations in the exchange rates. PCFC may be availed in rupees towards local payments for materials, labour, etc. Forward Cover for PCFC No exchange risk is involved if the PCFC is availed in the same foreign currency as the invoices. PCFC is advantageous as compared to the rupee packing credit due to interest differential and avoidance of conversion cost. Advance Against Duty-Drawback
