INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

EXCHANGE CONTROL REGULATIONS AND EXPORT FINANCE

 RBI being Central Bank of the country is empowered to

- Regulate the foreign exchange reserves
- Policies related to international trade
- Inflow and outflow of foreign exchange
- Supervisory powers over persons authorized to deal in foreign exchange.
- Responsible to maintain external value of rupee
and hence can issue instructions on exchange control from time to time.
 Exchange control was introduced in India, due to severe constraints of foreign exchange
during Second World War, with Defence of India Rules 1935 (DIR 1935) issued as
legislation.
 Later in 1973 the Rules were modified and introduced as an Act FERA 1973, which
came into force from 1.1.1974.
 With opening of economy, the FERA 1973 was repealed and a new Act FEMA 1999 was
introduced effective from 1.6.2000.

 In India, Export trade, Imports and other payments are regulated by the Directorate
General of Foreign Trade (DGFT) which functions under Ministry of Commerce and
Industries, Government of India.
 Policies and procedures required to be followed for export trade, Imports is announced
by DGFT.
 Financing of Export trade, Imports and facilities granted under FEMA regulations are
governed by RBI through guidelines
 Exchange control regulations as well as Imports and Exports trade control regulations
are applicable to all transactions of international trade.
 DGFT regulates the Trade Control part, through EXIM Policy and periodical
announcements in order to expand and control international business of country.
 Authorised dealers are to ensure compliance of several guidelines including not allowing
the banned or restricted items of import/ export, without proper approval.
 Before financing for any project for export or import it is very necessary to look into
exchange and trade control guidelines for exporters and importers

EXCHANGE AND TRADE CONTROL GUIDELINES FOR EXPORTERS

1. Importer- Exporter Code Number

 Every person/ firm/ company engaged in Export- Import trade has to apply for and obtain
and importer- exporter code number (IEC Number) from the DGFT. This is a registration
number of the company for international trade and exporter/ importer has to invariably
quote this code number in all declarations/ forms etc. As explained below:
2. Export Declaration Forms
 Section 7(1),(3) of FEMA – all export of goods from India, whether in physical form or
any other form, is required to be declared in prescribed form to the effect that full value of
export will be realized within prescribed period and prescribed manner
- SOFTEX Form – Export of software in non-physical form
- EDF Form – Electronic Declaration form – for exports other than software made by all
modes.
 - Electronic Data Interchange (EDI) system has been introduced in certain Customs
offices, where shipping bills are processed electronically, the GR form has since been
replaced by a declaration in form EDF.
3. Prescribed Time Limit
 For submission of Export Documents
- Exporter is required to submit export documents, along with exchange copy of EDF
form within 21 days from the date of shipment to an AD for collection, purchase,
discount or negotiation as the case may be.
 For Realization of Export Bills
- It is obligatory on the part of exporter that the amount of exports is realized and
repatriated into India, within the stipulated time period (9 months for the present in
place of12 months)
- No time limit has been prescribed for units in Special Economic Zones (SEZ) Status
holder exporters, 100% Export Oriented Units.
- Goods exported to a warehouse established outside India, for sale in other country,
on realization of export proceeds but within 15 months from the date of exports.
 If the bill is not realized within this time stipulation, the exporter should apply to his AD for
extension of time in ETX form.
 All overdue bills to be reported to RBI in half yearly statement XOS June and December.
4. Prescribed Method of Payment
 Payment for export proceeds should be received through medium of Authorized Dealers
(Ads) in any of the following manner:
- Bank draft/ Pay Order
- Foreign Currency Notes, Travellers cheques from the buyer
- Payment out of FCNR, NRE account of buyer
- International credit card when goods are sold during overseas visit of exporter.
- Indian rupees if transactions are with persons’ resident of Nepal.
- In form of gold/ silver/ platinum by gem and jewellery units situated in SEZ, provided
contract provides for same.
- In exceptional cases where track record of exporter in good, amount received directly
by exporter by cheque/ DD.

EXCHANGE AND TRADE CONTROL GUIDELINES FOR IMPORTERS

 Keeping in view the need to conserve the precious foreign exchange and to guard the
country from bogus outward remittance and scrupulous imports various import
regulations and exchange control guidelines have been prescribed from time to time.
 Physical movement of goods into India is regulated by EXIM policy formulated by DGFT
and regulation relating to payments of such imports are governed by exchange control
regulation framed on the basis of FEMA 1999.
1. Importer – Exporter Code (IEC)
 All importer customers have to have a valid IEC issued by DGFT. (Details already
covered in guidelines for exporters).
2. Approved Commodity – OGL or import licences
 ADs are required to ensure that goods imported or to be imported are as per exim policy.
Under the Open List (OGL) goods can be freely imported or they can be imported under
specific license issued by DGFT.
 This should be done prior to making import remittance, or handling import bill for
collection or opening of Letter of Credit for importer.
3. Payments for imports
 Any person who wants to make a remittance for imports exceeding USD 500 should
make application to Authorised dealer in form A1 (Prescribed by RBI)
 Form contains details of currency, total value of imports, commodity and licence number.
 Payment of import should be by debit to parties account. Payment method as described
in export regulations.
4. Time limit for import payment
 Remittance against import should be completed not later than six months from the date
of shipment.
 Any delay to be justified by proper explanation by importer.
 If payment is to made on deferred payment arrangement ( beyond six months upto 3
years) it will be treated as Trade Credit.
5. Advance remittances
 Remittance for advance payment against imports of goods allowed subject to following
conditions
- Upto USD 200,000 or equivalent after duly satisfying about transaction, nature of
trade and standing of supplier.
- If amount exceeds USD 200,000 an irrevocable standby letter of credit or guarantee
from bank of international repute.
- All cases beyond USD 500,000 should be referred to RBI for prior approval.
- Importer must have exchange control copy of a valid import licence for importing
goods.
- Remittance should be made directly to supplier or bank and not to an agent.
- Physical import into India should be within 6 months ( 3 years in case of capital
goods) from the date of remittance. Documentary evidence to be submitted within 15
days of relevant period.
- In case of non-import of goods into India, amount of advance remittance should be
repatriated back.
6. Evidence of imports
 Authorised dealer to cross check the particulars in the ‘Bill of Entry’ with particulars of LC
opened/ remittance made for imports, within 3 months from the date of remittance.
 Bill of Entry if not submitted with 1 month reminder should be sent by registered post with
AD.
 If importer defaults in submission of BOE after 21 days from notice, Authorised dealer
should report such defaulter to RBI on half yearly interval in form BEF.
 In case of imports by company listed on stock exchange whose net worth is 100 crores
and more, certificate from CEO or auditor in lieu of copy of bill of exchange is permitted if
foreign exchange remitted is less than USD 1,000,000.

FACILITY TO EXPORTERS

FOREIGN CURRENCY ACCOUNTS

 Overseas Foreign currency account –
- RBI has permitted exporters to open foreign currency accounts in foreign countries or
India to old export proceeds, for the purpose of making payments for goods imported.
- This saves exchange risk.
- Participants international trade fair/ exhibition have been allowed to open temporary
foreign currency account to deposit sale proceeds, but balance should be repatriated
to India within 1 month from close of exhibition or trade fair.
 Diamond Dollar Account (DDA) – Exporters/ importers dealing in rough and polished
diamonds- studded jewellery, with track record of 2 years & average export turnover of 3
crores (revised in Oct. 2009) can open DDA account with ADs. An exporter can open up
to 5 DDA accounts.
 Export Earner Foreign Currency (EEFC) account – any person resident in India who
earns foreign currency can open EEFC account with ADs. Currently 100% of inward
remittance is permitted as credit to the account. It is in form of Current account which
does not yield any interest and can be used for any current account transaction.
EXPORT FINANCE
 RBI has framed guidelines for finance to exporters so that they get finance at
concessional rate of interest, to make exporter compete with competitors and boost
exports of country.
 Export finance can both be in Indian rupee or foreign currency.
 Exporter may need assistance for procurement of raw material, manufacturing and upto
the stage of packing and shipment is called Pre-shipment finance.
 When shipment has been made, exporter may need finance against export bill called
Post-shipment finance.

PRE-SHIPshipment finance:
 Generally known as Packing Credit Loan (PCL) or Export Packing credit (EPC), is
essentially working capital advance for procurement of raw material etc.
 It covers all costs prior to shipment of finished goods.
 For sanction of pre-shipment finance pre-requisite is – borrower must have a firm export
order or Export Letter of Credit. Loan to liquidated out of relative export proceeds.
 While making appraisal, banks are required to follow guidelines of RBI, DGFT, ECGC
and banks’ own guidelines.

 At Pre-sanction stage:
- Borrower is banks customer with proper KYC.
- He should have Export/ Import Code number (IEC) allotted by Director General of
Foreign Trade (DGFT)
- His name should not be in caution list of RBI
- He has genuine and valid export order or LC and has capacity to execute order within
stipulated time
- Total period sanctioned should be as per manufacturing cycle, and quantum of
finance will be fixed on FOB value or LC after deducting profit margin.
- Normally total period of Pre-shipment credit limit (PCL) should not exceed 180 days.
Exceptionally can be extended up to 360 days. Any extension if permitted beyond
360 days, No concessional interest will be applicable.
- Interest rate linked to the benchmark – Marginal cost of funds based lending (MCLR)
w.e.f. 1st April 2016 for all commercial advances including exports.
- Bank may adopt a flexible attitude with regard to debt-equity ratio, margin and
security norms but no compromise in respect of viability of proposal and integrity of
borrower.

 At Post-sanction stage:
- No PCL has been availed by him against same order/ LC from any bank.
- Bank should call for Credit Report on the foreign buyer
- Exporter should submit stock statement regularly.
- If export is covered under LC, bank need to verify standing of opening bank.
- Bank to also look into regulations, political and financial conditions of buyers country.
- After disbursement of credit limits the disbursing branch should inform ECGC in 30
days ( if loan is covered by Whole Turnover Policies of ECGC)
- Advance should be liquidated on submission of relative export bill, by way of allowing
post shipment finance or otherwise also. Pre-shipment advance cannot be continued
after shipment of goods.
- In case if export does not take place after PCL, advance will be treated as local
advance and interest at domestic rate will be charged.
 POST-SHIPMENT FINANCE:
 Post shipment finance is essentially against receivables, which is in form of export
documents which are required to be sent to foreign bank for collecting proceeds.
 Realization of export proceeds is monitored by RBI, and some major exchange control
regulations are to be followed –
- Exporter should have a valid IEC code and each shipment should accompany
prescribed declaration form (SOFTEX/EDF)
- Shipping documents along with relative EDF form must be submitted to Authorised
dealer within 21 days from date of shipment.
- In case of rupee finance, bill is to be purchased/ discounted/ negotiated at
appropriate bill buying rate.
- Rate of interest will be as per RBI guidelines.
- Payment should normally be received in approved manner within prescribed time
limit, - 6 months.

 Export bill purchased/ discounted – export bill represents genuine trade transactions,
drawn in terms of sale contract may be purchased (sight bills) or discounted (usance
bills). Since they are not under LC bank faces more risk. In order to protect bank,
coverage is offered by ECGC against credit risk.
 Export bill negotiated - when export documents drawn under Letter of credit are
presented, bank scrutinize terms and conditions of LC before negotiation. Operations of
Letter of Credit are governed by Uniform Customs and Practices of documentary credit
(2007 revision) Brochure No. 600 of International Chamber of Commerce. Some of the
discrepancies which should be observed before negotiation are:
- Late shipment of goods
- Submission of documents after expiry of LC
- Excess drawing than LC amount
- Shipment from port other than stipulated in LC
- Presentation of incomplete set of Bill of Lading
- Variation in weight etc in invoice.
- Inadequate insurance amount
- Presentation of Inconsistent documents like certificate of origin, invoice, packing list,
weight list etc
 Advance against Bill sent on collection basis – if the bills are sent on collection basis
for various reasons like - export credit limit was exhausted or borrower requesting for
sending bill on collection basis as he was expecting strengthening of foreign currency,
may now request for giving advance against such collection. Such advance is rupee
finance for bank.
 Advance against exports on consignment basis – sometime goods are exported on
consignment basis for approval and sale abroad. Sale proceeds are sent for goods sold
and unsold goods are sent back.
 Advance against Undrawn balance – in certain cases in export trade, it is practice of
exporter to leave a part of amount unpaid for sometime as undrawn balance, which is
settled by buyer after satisfying about weight, quality etc on arrival and examination of
goods. Bank can provide advance against such undrawn balances subject to
concessional rate of interest for 90 days only.
 Advance against duty drawback – in some commodities particularly engineering goods
the domestic cost of production is higher than international prices, and hence export
becomes costlier to such exporters. Govt. Provides support to such exporters so that
they remain competitive in overseas market. Support is in form of export incentive under
Export Promotion Scheme. They are in form of refund of excise and customs duty known
as Duty Drawback. With the advent of GST from 1 st July 2017, now duty drawback in
addition to above would also consist of refund of GST also.
 Other Conditions:
- Period of finance – concept of Normal Transit Period (NTP) is applicable to all export
bill for calculating due date. NTP allowed at present is 25 days. Due date for demand
bill will be 25 days from date of handling and for Usance bill, usance period plus 25
days. Post shipment advance is allowed at concessional interest rate for a period of
NTP or NTP plus usance period plus transit period/ grace period, but in case not
exceeding 180 days from the date of shipment.
- Quantum of finance – in case of post shipment advance normally no margin is
maintained for bills drawn under LC, however, bank generally keep 10% margin so
that profit margin is not financed. In cases of confirm orders margin of 10% to 25% is
maintained depending on security available and past track record of exporter.
- Crystallization of overdue export bill – all export bills drawn in foreign currency,
purchased, discounted or negotiated, liability by exporter is to be realised on due date
and currency to be delivered to the bank. In case of non realization of export bill on
due date it remains as liability and to restrict this period of uncertainty, FEDAI has
given guidelines. Foreign exchange liability should be crystallized into rupee liability
on 30th day from due date (or next working day if 30day is non banking day) of bill at
prevailing TT selling rate.

 EXPORT CREDIT IN FOREIGN CURRENCY

 With a view to make credit available to exporters at internally competitive interest rates,
banks in India have been permitted to extend export credit in foreign currency to its
exporter borrower at LIBOR linked rates.

 Pre-shipment Credit in Foreign Currency (PCFC) -

 PCFC can be allowed to exporter in foreign currency also (USD, Euro, Pound Sterling or
JP Yen) out of foreign currency balance available with bank in EEFC, FCNRB, RFC or
borrowings from banks/ correspondents abroad.
 PCFC can be allowed initially for maximum period of 180 days which can be extended.
 Spread is related to international reference rate such as LIBOR/ EURO LIBOR and now
bank is free to determine rate on export credit in foreign currency w.e.f. 5/5/2012 (earlier
it was 2% over benchmark for 180 days).
 PCFC is to be liquidated by discounting/ rediscounting foreign bill under EBR scheme.

 Export Bill Rediscounting Abroad (EBR)

 EBR scheme is to finance export bill in foreign currency, and is equivalent to FBP or
FUBD. EBR can also be allowed against funds with bank as in case of PCFC.
 Proceeds of bill handled under EBR will go for adjustment of PCFC if any.
 If no PCFC rupee equivalent at TT buying rate will be credited to exporters account.

 GOLD CARD STATUS FOR EXPORTERS

 Gold card scheme was launched as per indication of Govt. In Foreign Trade Policy 2003-
04, for creditworthy exporters with good track record for easy availability of export credit
on best terms.
 Certain additional benefits based on the performance of exporter have been provided.

Salient features of the scheme are:

 Better terms of credit including interest rate.
 Application will be processed at norms simpler and under a process which is faster.
 Loan to be sanctioned with simplified procedure.
 In-principle limits will be sanctioned for a period of 3 years with a provision of automatic
renewal subject to fulfilment of terms and conditions of sanction.
 A stand-by limit of not less than 20% of assessed limit may be additionally made
available for unexpected/ sudden orders.
 In case of unexpected export orders norms of inventory may be relaxed.
 Request from card holder would be processed quickly by banks, within 25 days/ 15 days
and 7 days for fresh application/ renewal of limits and adhoc limits respectively.
 Banks may consider waiver of collateral and exemption from ECGC guarantee scheme.
 Concessional interest on post shipment rupee export credit applicable up to 90 days
which may be extended for a maximum period of 365 days.

 FACTORING
 Continuing agreement between a financial institution (known as factor) and business
concern (exporter/ seller), whereby factor purchases clients’ book debts, either with
recourse or non recourse to client and in turn administer sales ledger.
 Thus purchase of book debts is principal function while administration of sales ledger is
secondary function of factor.
 Factoring was introduced in 90’s on the recommendations of Kalyanasundaram
Committee.
 Advantages of factoring are – immediate finance up to 75-80% of invoice value, No need
for LC thus saving cost of importer, sales ledger maintenance, advisory services for new
areas and countries.

 FORFEITING
 Another product for financing export receivables, mechanism for financing by discounting
of export receivables without recourse to exporter/ seller for full value of contract/ invoice.
 Forfeiting is purchase by financer of medium term export claims on buyers, without
recourse to exporter. It is source of finance and not a type of credit insurance as such no
other cost.
 It generally covers medium-term financing export of capital goods, projects etc. made
generally on medium term basis, however there is no restrictions for export commodities,
consumer goods where exports are for short period of say 12 months.
 Advantages of forfeiting are – takes away political and commercial risk associated with
export receivables, 100% finance against invoice, without recourse, cost saving on
insurance and other paper work.

Prepared by:
Arvind Paranjape, M.Sc. CAIIB
paranjape.arvind@yahoo.com
9425067026