MONDAY EXPORT CLASS

With

GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)

 Topic: Instrument of Payment and Method of Financing (Part 3)

 

POST SHIPMENT FINANCE

Post-shipment finance may be defined as loan or advance granted by the bank to the exporter after the date of shipment of goods till the date of realisation of export proceeds. It includes any advance granted on the security or in consideration of the amount of duty drawback or any kind of receivable in the form of incentives to be received from Government.

While granting advances for post-shipment, banks are guided by the directives of RBI, the rules of Foreign Exchanger Dealers’ Association of India, the Trade Control and Exchange Control Regulations and the International Conventions and  Codes  of  the  International Chamber of Commerce. The quantum of credit depends on export sales and receivables.

Compliance of Exchange Control Provisions

Post-shipment finance  is  granted  under  various  methods.  Exporter  seeks  the  sanction of appropriate type advance from the bank, depending upon the actual requirement. Bank scrutinises the following documents to verify the compliance of exchange control provisions by the exporter:

• Whether the documents are drawn in permitted currencies and the payment receivable is under permitted method of
• Whether the relevant GR/PP is duly certified by the customs authorities and the particulars contained are consistent with the particulars in other documents and export contract/firm order/letter of
• The documents are submitted for negotiation within the prescribed period  and  in case of delay, delay is supported by sufficient documentary
• Usance bill is in consonance with the time limit

Types of Post-Shipment of Finance

Let us  discuss  the  various  types  of  post-shipment  finance.

1. Negotiation of Export Documents under Letters of Credit

When the export bill is drawn under letter of credit arrangement, it is the duty of negotiating bank to scrutinise carefully whether all the documents required under L/C are presented and they are drawn in conformity to the terms of letter of credit. If the documents are in order and comply with the total terms of letter of credit  only,  the  negotiating  bank makes the payment to the exporter. Even if there  is  slightest  deviation  from  the  terms  of letter of credit or there is even minor discrepancy in the documents, the negotiating bank does not make the payment to the exporter. There is no distinction between major and minor discrepancy. If the documents are not in order, even after the negotiating bank makes payment to the exporter, opening bank does not make reimbursement to the negotiating bank.

2. Purchase/Discount of Foreign Bills

When the exporter has not received the letter of credit from the importer, as mode of payment, exporter requests the bank to purchase / discount documents for receiving immediate payment. Bill may be drawn on D/A (Documents against Acceptance) or D/P  (Documents against Payment) basis, dependant on the terms of the export contract. Bank hands over the documents only on receipt of payment from buyer, in case of D/P basis. So, bank is reasonably secured in case of default in payment as title to goods is in possession of the bank. In case of D/A bills, document of title would be given to the buyer, on acceptance of the usance bill. So, risk is greater to the bank  as  no  security  lies  with  the  bank,  in  case  of  default  in payment by the importer. The credit worthiness of the buyer is  important  in  such  a  case. When the exporter enjoys the sanctioned  limit  for  purchase/discount  of  bills,  exporter  can get the  funds  immediately.  When  it  is  D/P  bill,  the  bank  purchases  it.  The  term  ‘discount’ is used in case of D/A bill. To cover the risk, banks insist on the exporter to take ECGC policy  in  favour  of  the exporter and assign the policy in favour of bank. Under the policy,  ECGC  may  fix  payment terms and limits to the individual buyers and bank has to ensure that the limits  are  not exceeded while purchasing the bills. More so, banks can also take guarantee from ECGC in respect of post-shipment finance either on  selective  or  whole  turnover  basis.  If  the  buyers are new, banks may also obtain credit reports about the buyers before purchasing the bills, drawn on them.

3. Advance Against Export Bills Sent on Collection

Bills drawn on importer are sent on collection basis through the bank under the following circumstances:

• When the documents drawn under L/C contain any discrepancies but bank  is confident that the buyer will retire the documents and
• When the bill purchase limit of the exporter is exhausted and bank is not willing to sanction additional

Under the above circumstances, bank may finance a part of the total bill amount as advance. As and when the bill is realised, the advance will be liquidated and the bank will pay the balance to the exporter. This advance carries the same rate of interest, applicable to post-shipment finance.

4. Advance Against Exports Sent on Consignment Basis

Sometimes, exports are  made  on  consignment  basis.  Until  the  sale  is  made  in  respect of goods sent on consignment, title to the goods remains with the exporter. Consignment exports are treated at par with outright sales. So, rules and regulations of pre-shipment finance applicable to outright sale is equally applicable to consignment exports.

5. Advance Against Export Incentives

Advances against export incentives are sanctioned by bank both at pre-shipment and post-shipment stage. Advance under this category is sanctioned when the exporter has  to receive the duty drawback incentive from Government,  refund  of  customs  and  excise  duty and differential between the indigenous and international prices of raw materials.

Normally, in such case, bank gets power of attorney executed by the exporter in favour of bank and registers with the concerned  authority  such  as  Director  General  of  Foreign Trade, Commissioner of Customs etc. Bank  sanctions  this  type  of  advance  only  when  the bank grants other facilities to the same exporter.

6. Advance Against Undrawn Balances

Sometimes, the exporter does not draw the bill for the full value of the invoice as per custom of trade in that particular line of business. A part of the invoice value is not drawn due to difference in weight, quality and other factors, not fully settled between the exporter and importer. Buyer settles the final price only after inspection and approval of the goods. Bank advances against the undrawn balance to facilitate the exporter. The undrawn balance cannot be more than 5% of the total invoice value. The exporter has to give undertaking to realise and surrender the balance amount too within the prescribed period of 180 days from the date of shipment of goods.

7. Advance Against Retention Money

In case of some exports, in particular capital goods and project exports, buyer withholds a small part of the invoice value towards guarantee of performance. If this balance amount is payable within one year from the date  of  shipment  of  goods/services,  banks  advance against such retention money at concessional rate of  interest.  The  maximum  period  of advance is 90 days. However, if the retention money is payable after a period of one year from the date of shipment of goods, such advances are to be treated as deferred payment advances. In such cases, banks do not extend concessional interest rate. The rate of interest will be as determined by the bank.

8. Post-shipment Credit in Foreign Currency

The exporter has the option of availing the post-shipment credit in Indian  rupees  or foreign currency. When the exporter opts to avail the credit in foreign currency, the interest rate will be linked to LIBOR (London Inter  Bank  Offered  Rate).  The  credit  has  to  be liquidated in foreign currency.

9. Buyers’ Credit

Under the Buyers’ Credit scheme, buyer is extended credit by a financial institution or consortium of financial institutions. Exporter gets the payment immediately. When the financial institution is located in supplier’s country, there is no transfer of funds from one country to another as the financial institution in India makes remittances in Indian rupees to the exporter and gets repayment of loan in foreign currency. However, if the financial institution is located in the buyer’s country, there is immediate remittance of funds from the buyer’s country to the supplier’s country to enable the supplier to get payment. This type of credit is normally extended for capital goods.

RBI’s approval is needed in extending the buyer’s credit as payment is made to the exporter on behalf of resident buyer. The authorised dealer should make application, in Form DPX 6, for this purpose.

10. Line of Credit

When a number of buyers are located in the same country, instead of extending credit to different buyers, line of credit is extended to a financial institution located in the buyer’s country by the financial institution from seller’s country. The advantage is  that  the responsibility in judging the creditworthiness of different buyers and recovery from them is shifted to that financial institution located in buyer’s country. In this process, the financial institution extending line of credit, in the exporter’s country, becomes totally free from the worries connected with identifying the buyers, in importer’s country, and  recovering  from them.

If you have questions on today’s class send them on whatsapp to +2348037163281 for answers to such questions.

Till then, you will succeed