International Trade

Finance
 Introduction
• In order to understand international trade finance it is mandatory
to understand the features of international trade first.
• International trade is different from domestic trade.
• In case of international trade buyer and seller are from different
countries and virtually everything differs in the buyer’s country
and seller’s country.
• International trade is subject to different types of environment i.e.
PEST environment, Regulatory and sovereign environment.
• GATT and WTO has removed all types of barriers of international
trade and created ‘Free Trade” environment.
• International trade is subject to different types of risks like
Currency Risk, Credit risk, Country risk, Market risk, Operational
risk and documentation risk.
 International
Trade Finance

Import Finance Export Finance

Fund Based Non Fund Based Fund Based Non Fund Based

External
Issue of Letter of Pre Shipment Confirmation of
Commercial
Credit Finance Letter of Credit
Borrowing (ECB)

Trade Credit –
Issue of Bank Post Shipment Negotiation of
Buyers/Supplier’s
Guarantee Finance Letter of Credit
Credit

Issue of Bank
Guarantee
 Features of External Commercial Borrowing(ECB)
Sr.
Parameters FCY denominated ECB INR denominated ECB
No.
Currency of Any freely convertible Foreign
i ECB in Indian Rupee
borrowing Currency
ii Forms of ECB Bank Loans- floating or fixed Bank Loans- floating or fixed rate, bonds,
rate/ bonds/ debentures Trade debentures, preference shares Trade
credits beyond 3 years; FCCBs; credits beyond 3 years; Rupee
FCEBs denominated bonds issued overseas,
which can be either placed privately or
listed on exchanges as per host country
regulations.

iii Eligible All entities eligible to receive a) All entities eligible to raise FCY ECB;
borrowers FDI. Further, the following and
entities are also eligible to raise b) Registered entities engaged in micro-
ECB: finance activities, viz., registered NPNL
i. Port Trusts; companies, registered societies/trusts/
ii. Units in SEZ; cooperatives and NGOs.
iii. SIDBI; and
iv. EXIM Bank of India.
 Features of External Commercial Borrowing(ECB)
Sr. No. Parameters FCY denominated ECB INR denominated ECB
iv Recognised The lender should be resident of FATF compliant country, including on transfer of
lenders ECB.
v Minimum Average MAMP for ECB will be 3 years and maximum will be 10 years.
Maturity Period

Sr.No. Category MAMP

ECB raised by manufacturing companies up to USD 50 million or its equivalent per

(a) 1 year
financial year.
ECB raised from foreign equity holder for working capital purposes, general corporate
(b) 5 years
purposes or for repayment of Rupee loans
ECB raised for
(c) (i) working capital purposes or general corporate purposes 10 years
(ii) on-lending by NBFCs for working capital purposes or general corporate purposes
ECB raised for
(d) (i) repayment of Rupee loans availed domestically for capital expenditure 7 years
(ii) on-lending by NBFCs for the same purpose
ECB raised for
(i) repayment of Rupee loans availed domestically for purposes other than capital
 Features of External Commercial Borrowing(ECB)
vi All-in-cost ceiling Benchmark rate plus 450 bps spread.
per annum
vii Other costs Prepayment charge/ Penal interest, if any, for default or breach of covenants,
should not be more than 2% over and above the contracted rate of interest on the
outstanding principal amount and will be outside the all-in-cost ceiling.

viii End-uses ECB funds can not be used for the following:
(Negative list) a) Real estate activities.
b) Investment in capital market.
c) Equity investment.

ix Exchange rate Change of currency of FCY ECB into INR For conversion to Rupee, the exchange
ECB can be at the exchange rate rate shall be the rate prevailing on the
prevailing on the date of the agreement date of settlement.
 TRADE CREDITS FRAMEWORK
Sr.
Parameters FCY denominated TC INR denominated TC
No.
i Forms of TC Buyers’ Credit and Suppliers’ Credit.
ii Eligible borrower Indian importers.
iii Amount under Up to USD 150 million or equivalent per import transaction for oil/gas refining &
automatic route marketing, airline and shipping companies.
For others, up to USD 50 million or equivalent per import transaction.
iv Recognised lenders 1. For suppliers’ credit: Supplier of goods located outside India.

2. For buyers’ credit: Banks, financial institutions, foreign equity holder(s) located

outside India and financial institutions in IFSCs located in India.
v Period of TC The period of TC from the date of shipment, shall be up to 3 years for import of
capital goods.
For non-capital goods 1 year or the operating cycle whichever is less.
For shipyards/shipbuilders, the period of TC for import of non-capital goods can be
up to 3 years.
vi All-in-cost ceiling Benchmark rate plus 250 bps spread.
per annum
vii Exchange rate Change of currency of FCY TC into INR For conversion to Rupee, exchange rate
TC can be at the exchange rate shall be the rate prevailing on the date of
prevailing on the date of the agreement settlement.
 TRADE CREDITS FRAMEWORK

Sr.
Parameters FCY denominated TC INR denominated TC
No.
viii Hedging provision Hedging by the borrower is The overseas investors are eligible to
necessary. hedge their exposure in Rupee.

ix Change of Change of currency of TC from one Change of currency from INR to any
currency of foreign currency to any other freely convertible foreign currency is
borrowing foreign currency as well as to INR is not permitted.
freely permitted.
 Documentary Letter of Credit-tool of import finance
• Definition:-
• It is written unconditional undertaking given by buyer’s bank on behalf
and at the request of the buyer in favour of seller or beneficiary:
a) either to make payment of DP documents or to accept DA documents
& to make payment on due date
b) To make arrangement for negotiation of documents under LC by
nominating a bank in the seller’s country
• Provided seller or beneficiary submits documents strictly as per terms
& conditions of the LC within time frame. Time frame for submission of
LC documents is maximum 21 days from the date of shipment.
Documents submitted after 21 days are considered as stale documents.
• All documentary letters of credit are governed by articles of “Uniform
Customs & Practices for Documentary Credit (UCPDC)” publication
No.600 dtd 1/7/2007 of International Chamber of Commerce (ICC)
Paris.
 Mechanism of Documentary Letter of Credit
• Buyer & Seller enter into a contractual relationship by way of sale contract. Sale contract
is required by LC issuing bank because LC is a replica or mirror image of sale contract.
• Buyer approaches his bank and requests to open LC on his behalf in favour of overseas
buyer.
• LC opening bank prepares Draft LC incorporating all the terms & conditions of sale
contract in the LC but converting all terms and conditions of sale contract in to
documents because LC operates and LC payment is made on the basis of documents
only.
• LC opening bank transmits LC through SWIFT to its foreign correspondent with a
request to advise LC to seller or beneficiary.
• After receipt of LC seller makes timely shipment and prepares of set of original
documents and submits them to Nominated bank in his country for negotiation.
• Nominated bank scrutinise LC documents strictly as per terms & conditions of LC, if
found correct makes payment on behalf of LC opening bank & forwards set of original
documents to LC opening bank & claims reimbursement.
• LC opening bank also checks set of original documents & if found correct debits the
account of the buyer/importer and hands over the documents to importer for custom
clearance of goods.
 Export Finance
• Export finance is a short term, fund based, direct, working capital finance
given by commercial banks to the exporter on the basis of confirmed export
order or Letter of credit, for the purpose of manufacturing, procurement,
processing & preserving of goods for export purpose.
• RBI Guidelines on Export Finance:
• Target to AD banks. Earlier it was 12% of their total Net Banking Credit (NBC).
Now it is decided by every bank on their own.
• Export finance must be provided in a timely manner, adequate and at
affordable cost.
• New proposal for export finance should be sanctioned within 45 days, renewal
of existing export finance limits should be completed within 30 days and
request for ad-hoc finance should be completed within 15 days.
• Export finance should be as per requirement. Over finance and under finance
are equally dangerous. Over finance leads to diversion of funds and under
finance leads to borrowing at high cost from other sources.
 Export Finance
• Export finance is a subsidised finance. Government of India gives 3% interest
subsidy or interest subvention on export finance.
• Export finance can be availed by the exporter either in Rupee terms or in
foreign currency terms at the option of the exporter.
• Rate of interest on Rupee finance is linked to Base Rate (BR) of the particular
bank and Rate of Interest on foreign currency finance is linked to London
Interbank Offer Rate (LIBOR).
• Export finance is always provided in two stages i.e. Pre-shipment finance and
Post-shipment finance.
• Any exporter availing pre-shipment finance is under obligation to avail Post-
shipment finance because repayment or liquidation of Pre-shipment finance is
always from the proceeds of Post-shipment finance.
• As such export finance is self liquidating finance.
 Export Finance
• Pre-shipment Finance: It is the finance from the date of the order (given on
the basis of order or LC) till the date of shipment and popularly known as
“Packing Credit Limit (PCL)”. It is a ‘Anticipatory” Finance.
• Pre-shipment finance in foreign currency is referred as “Packing Credit in
Foreign Currency (PCFC)”.
• Post-Shipment Finance:- It is finance from the date of shipment till the date
of payment of export bill at overseas centre. It is “Performance Finance”.
• It is a ‘Bill Finance” or “Book Debt Finance” and it is always given by way of
Purchasing DP (Cash Sale Export Bills) Export Bills, discounting DA (Credit
Sale Export Bills) and Negotiation of export bills drawn under Letter of Credit.
 What is Running Account facility?
• This facility is provided to the exporters having good track record,
100% EOU operating in SEZ, STP, EHTP, BTP.
• Under this facility Pre-shipment credit or PCL is provided without
order or LC but on the basis of undertaking of the exporter that he
will submit original export order or LC within 45 days.
• Pre-shipment finance or PCL is provided without order or LC for
procurement of seasonal raw material on the basis of past
performance and future projections.
• In normal course, pre-shipment finance or PCL is provided and
monitored by financing bankers on a order to order basis. But
under running account facility, PCL can be liquidated either on
LIFO or FIFO basis whichever is suitable for the exporter.
 Gold Card Scheme for Exporters

• In order to boost exports by offering export credit at competitive terms and

conditions and better and efficient services, for exporters having good track
record and emphasis on SME sector exporters.
• Exporters with credit worthiness and good track record & whose account is
classified as `Standard' continuously for a period of 3 years and there are no
irregularities/adverse features in the conduct of the accounts are eligible.
• Exporters who are blacklisted by ECGC of India Ltd. or included in RBI's
defaulter's list/ caution list or making losses for the past 3 years or having
overdue export bills in excess of 10% of the current year's turnover, will not be
eligible under Gold Card Scheme.
• Sanction of Credit Limits
The time frame for disposal of applications received for sanction of credit
under the Gold Card Scheme would be as under: -
a) Fresh applications 25 days
b) Renewal of limits 15 days
c) Sanction of adhoc limits 07 days
 Gold Card Scheme for Exporters

• Limits sanctioned for 3 years

• Sanctions on the basis of export turnover.
• Adhoc limit of 20% over & above sanctioned limits.
• Preference to Gold Card holder for granting export credit in foreign currency.
• Rate of interest reduced up to 25BPS on Rupee Export Credit.
• Rate of interest not exceeding LIBOR plus 75 BPS on Credit in Foreign
Currency.
• Concessions in commission, refinement in exchange rates, concessions in
other charges etc.
• International Debit Card/ ATM Card, Anywhere Banking facility, De-Mat
Accounts, Waiver of commission on sale of Travellers cheques etc.

• The tenure of the Gold Card is 3 year and will be automatically renewed for a
further period of 3 years
 Period of Export Finance:
• Maximum period of Pre-shipment finance can not exceed 360 days
i.e. concessional rate of interest will be applicable for a maximum
period of 360 day.
• Maximum period of post shipment finance can not exceed 180
days.
• Quantum of Export Finance
• While deciding quantum of export finance, banks will only consider
FOB cost of the export order i.e. banks will not finance freight and
insurance cost.
• Quantum of pre-shipment finance is always decided on the basis
of nature of goods and marketability of the goods.
• Quantum of finance of post shipment finance is decided on the
basis of track record of overseas buyer and nature of cash flow.
• Crystalisation of Overdue Export Bills:
• As per FEDAI guidelines overdue export bills will be crystalised
after 30 days from the due date.
• Crystalisation of overdue export bill is always done at TT Selling
rate.
• Any foreign exchange transaction is always cancelled at opposite
TT rate.
THANKS