Export Finance

3. Documentary Collections: Documentary Collection is a settlement mechanism where banks play the role of facilitators between an exporter and an importer. Here, trade documents are treated as the most important instrument, against which payment is initiated. The exporter is required to submit important documents to his bank which enables transfer of title and ownership to the importer. The exporter's bank will send these documents to the importer's bank with payment instructions. The importer's bank releases these documents (to the importer) strictly against payment from the importer as per the agreed terms. This money is remitted to the exporter's bank and later to the exporter. This system is also called Bills of Exchange, as the bank exchanges the document against payment from the importer. From the exporter's perspective, the task of collection is handed over to his bank. If by chance importer does not pay, the exporter will have to find another buyer, bear the return logistical cost, or abandon the merchandise. 

Mechanism of Documentary Collection Payment:

1. The exporter and importer should mutually agree and adopt documentary collection for payment in their trade agreement.

2. The exporter prepares a Bill of Exchange and sends it to his bank, which is forwarded to the importer’s bank.

3. The Bill of Exchange provides clear instructions to the bank about the documents required, amount of payment, terms of payment and transfer of title to goods.

4. The importer’s bank hands over the documents to the importer according to the options specified in the bill of exchange, which can be as follows:

• Release of documents against receipt of full payment from the importer.

• Release of documents against receipt of an acceptance committing for future payment signed by the importer.

5. After payment / acceptance, the importer receives the documents and uses the same for getting custom clearance of the goods.

6. The importer’s bank forwards the importer’s payment back to the exporter’s bank account.

Check out a few sample of Letter of Credit below:

4. Open Account: Under Open Account payment method, goods are shipped and delivered to the importer before receipt of payment. This is one of the most beneficial option for the importer, as he can avail 30, 60 or 90 days credit period. This enables importers to retain cash for a desired period of time, which can be diverted into other operations. But on the other hand, this is one of the most riskiest option for the exporter. The exporter's receivable gets blocked for a certain period of time creating working capital issues. With intense demand in international trade, exporters are bound to accept Open Account option so as to make, retain and sustain international buyers. Exporters may loose a transaction if they are reluctant to extend desired credit period to the importer. With Open Account method of payment, an exporter should mitigate commercial risk by opting for export credit insurance. In India, it is Export Credit Guarantee Corporation Scheme. 

5. Consignment: Consignment method is very much like Open Account method. That means, goods are shipped and delivered to the importer and the payment is received later.  The only difference is that payment is received only after selling the goods to the final consumer. In simple words, goods are consigned by the exporter to a consignee. The consignee undertakes marketing risk and sells them off in his foreign market or may distribute to retailers / wholesalers. Once the money is received by the importer (consignee), only then he remits the principal amount to the exporter. This method is possible only with strong trust and relationship with the overseas buyer. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. 

Countertrade

In international trade, countries exchange goods and service for money. Counter trade is a mechanism where goods and services are exchanged for other goods and services and not for money. You would have been reminded of the word 'barter', and you are right. As markets become more global, companies are realizing that selling a product does not necessarily bring in a currency. It may bring in scotch, a voucher for a European tour package, infrastructural investment or even advertising space. However in countertrade, monetary evaluation can be applied for accounting purpose. Countertrade is in existence since 1972 and has involved around 100 countries by 1990s. A major part of countertrade involves supply of military equipment. 

Why nations countertrade?

• Countertrade allows nations with limited access to liquid funds to exchange goods and services with other nations.

• Facilitates nations to build strong relations through corporate and government tie ups.

• Allows nations to develop international contracts.

• Enables saving of foreign exchange for nation deprived of resources.

• Acts as an alternate source of finance for companies as there is no application of money.

• Countertrade also can mitigate the risk of price movements or currency-exchange-rate fluctuations. As countertrade deals in real goods, not financial instruments, countertrade can solve the inflation risk involved in foreign currency procurement.

• Restrict outflow of currency enabling a country to bring profits in the form of goods than money.

Some example of Countertrade

1. In 1959, American Vice President Richard Nixon and Soviet Premier Nikita Khrushchev attended the American National Exhibition in Moscow, Russia. During the meet, the head of the Pepsi International Donald Kendall splashed the two gentlemen to sip his so called sweet soda. The Soviet Premier was impressed with the drink and immediately struck a deal for shipment of the beverage. The Russian currency (Rubble) was termed useless for the Americans and the final deal was to exchange 'the Russian Vodka' for the Pepsi beverage. The two agreed that Russia shall receive the Pepsi beverage and in return would provide Stolichnaya Vodka for resale in the United States. This relationship was shattered during 1980 when the Soviet invaded Afghanistan which lead to boycotting of Russian products in America. Though the Americans expressed a boycott, the Russians still loved the American Pepsi and its beverage. With all the love for Pepsi beverage, the Soviet offered a Marine Cruiser, a frigate, a Destroyer, 17 submarines and some oil tankers. All this, for a onetime $ 3 Million. This treaty made Pepsi International the 6th largest navy in the world.

What happened later? Pepsi Co sold all the warships to a Swedish scrap recycling company. Donald Kendall, Pepsi Co CEO said "I am dismantling the Soviet Union faster than you are."

2. In 1984, a Saudi Arabia airline company named Saudia purchased 10 Boeing 747 jumbo jets from Boeing Company, USA in exchange for the Saudi oil worth $ 1 Billion. The company had already purchased 39 airliners from the same company by paying cash. The strategy behind the deal was to save Saudi Arabia from from falling into foreign exchange drain. The Boeing Company didn't take the oil in its custody. Rather, authorized Petromin (the national oil company of Saudi Arabia) to get the oil marketed through a big financial institution. Boeing Company received cash in the future date, which valued more than 30 Million barrels of Saudia Arabian oil. 

3. In 1994, Daimler Benz (Mercedes) from West Germany agreed to sell 30 trucks to Romania in exchange with 150 Romanian made jeeps. These Jeeps were sold to Ecuador in exchange for bananas. These bananas were brought to West Germany and sold to a West German super market chain in exchange for domestic currency. Through this circuitous transaction, it finally achieved payment in domestic currency.

4. In 1988, Pepsi Company entered Indian markets seeing the exit of Coca Cola. Having a joint venture with Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited, the Pepsi Company sold beverage in the name of 'Lehar Pepsi' and committed the Indian Government to provide 50,000 employment opportunities, make 75% investments in food and agro processing, bring advanced technology to India and sell 50% of the production abroad as exports. This creamy offer was accepted by the Indian Government and since then, Pepsi has touched the taste of India.  Prior to this, Pepsi tried to gain access to Indian market through a venture with RP Goenka Group in 1985, where the deal was to exchange cola concentrate with juice concentrate from the state of Punjab. The plan was however rejected by the Indian Government on two grounds which were (i) bar the import cola concentrate for exchange of juice concentrate and (ii) disallow use a foreign brand name (Pepsi) in India as per the regulatory framework. 

So, what happened later?

Pepsi's tomato farming project was primarily responsible for increasing India's tomato production. Production of tomatoes increased from 4.24 million tonnes in 1991-92 to 5.44 million tonnes in 1995-96. The company used high yielding seeds for enhance cultivation. In When Pepsi set up its Tomato paste plant in 1989, Punjab cultivated 28,000 tonnes of tomatoes against their need of 40,000 tonnes. This touched 2,50,000 tonnes by 2000 crossing all boundaries. ENtry of Pepsi in India gave a tough competition to existing brands like Parle's Thumbs Up (which was later acquired by Coca Cola), Gold Spot, Limca, Dukes and Campa Cola.

Types of Countertrade

Countertrade is not just limited to barter. There are a variety of options nested in ball of countertrade. Let's understand a few of them.

1. Barter Trade: Barter trade refers to direct exchange of merchandize of comparatively equal value. There is no involvement of money as an exchange medium and the trade takes place only between two parties. A perfect example of barter can be a local Bhandi Wali, who collects old cloth, scrap, etc. in return for metal vessels as per the value and her valuation. Some corporate examples can be:

(i) The Malaysian Government purchased 20 diesel electric locomotives from General Electric against the supply of around 2,00,000 metric tons of palm oil over a period of 30 months. 

(ii) Minerals and Metals Trading Corporation of India (MMTC) imported 50,000 tons of rails valuing $38 million from a Yugoslavian company in exchange with iron ore concentrates and pellets of the same value. 

2. Buyback: Buyback is a smart situation where a company facilitates infrastructural development by way of supplying technology, AI, equipment, knowhow, training, etc. to one country and agrees to take a specific percentage of the supplied output as a partial payment for the contract for a certain period of time. Such agreements lead to transfer of technology and development from high developed nations to less developed nations. This allows long lasting global and mutual relations, utilization of technology and inflow of goods without outflow of cash for the exporting company. Whereas the importing country receives technological support, scope for manufacturing and export along with increased business and employment opportunities. Check the below examples: 

(i) Pepsi Company supplying tomato paste making machine and equipment to India with an agreement to take over 50% of the produced tomato paste to the US as consideration. This is also called Compensation Trade.  

(ii) National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash 

3. Counter Purchase: Counter Purchase is a transaction where two parties engage in two different contracts one after the other. These contracts obliges both the parties to buy and sell from each other. Both the contracts can have its own value to be delivered in cash. The exporter sells a product to the importer for a given price and agrees to purchase some other product (which is not related to his business) from the importer to offset (compensate) the importer's cost. In short, the exporter will receive cash today but commits to buy goods from the importer within a specific period of time. In real practice, this mechanism allows the importer to recover the money paid during the first contract. Whereas, the goods purchased by the exporter in the second contract can be sold to another party though a trade merchant. Example, General Electrics , USA supplied aircraft engines for Jas Gripen figher jets to SAAB, a Swedish defense and civil security technology Company for $ 300 million payable in cash, only after agreeing to buy Swedish industrial products over a period of time. 

4. Switch Trading: Switch Trading is a three party based transaction which involves flow of goods and cash as well. Here, goods are supplied by an exporter to an importer under a Switch Countertrade Agreement. During a situation where the exporter in the countertrade is disinterested to accept the goods offered by the importer as barter payment, he (exporter) can instruct the importer to ship the goods to the third party. Now, the third party will pay cash to the exporter for the goods he received from the importer. In short, the goods offered by the importer to the exporter will go to the third party and the third party shall make payment in cash to the exporter. Example, an Indian exporter sold temperature containers to an Italian importer. The Italian importer offered Italian Cheese to the Indian exporter for which, the Indian exporter did not show any interest. The Indian exporter will request the Italian importer to ship the Italian Cheese to a trader in Egypt. Now, this Egyptian trader will receive the Italian Cheese and will be bound to pay the Indian exporter in US Dollars.

5. Clearing Arrangements: This type of trading is between two or more than two countries in the shape of an agreement, under which agreed volume of goods are imported and exported over a specific time period without the payment of foreign currencies. At the end of the agreed time period, the balance is settled in an agreed foreign currency for example US Dollars. Let us take an example of two countries India and Bangladesh in the below diagram. 

Let's assume India and Bangladesh sign an agreement for a specific period of time, say one year. The Indian exporters will export goods to the Bangladeshi importers who, instead of paying directly to the Indian exporters will pay to their (Bangladeshi) Government. The Bangladeshi Government will inform the Indian Government that the payment for such specific goods have been received. Upon receipt of this information of from the Bangladeshi Government, the Indian Government will release payment to Indian exporters in Indian Rupees. 

Similarly, the Bangladeshi exporters will also export goods to Indian importers considering the same mechanism. It can be noticed in the above example that no payment in foreign currency has been done by any of the government to other government. Only the information of payments has been shared by both the governments during the period of the agreement. 

At the end of the period of the agreement, only the balance amount outstanding (if any) will be paid by the deficit Government in an agreed foreign currency like USD. For example, India exported goods worth USD 10 million to Bangladesh and Bangladesh exported goods worth USD 8 million to India. Here, India has exported in surplus to Bangladesh, which stands at USD 2 million. This balance of USD 2 million will be paid by Bangladeshi Government to the Indian Government at the end of the period of the agreement. This method saves the foreign exchange of a country as payment for every individual transaction need not be made. This method focuses on paying only the deficit balance aroused during a given period of time. 

In reality, Malaysia has clearing arrangement with 23 countries namely Albania, Algeria, Argentina, Bosnia, Botswana, Chili, Fiji, Indonesia, Iran, Laos, Mexico, Peru, Philippines, Romania, Seychelles, Thailand, Tunisia, Vietnam, Zimbabwe, etc.  

6. Offset: Offset is an international agreement where the exporter is required to manufacture the product in the importer's country or purchase components from the importer's country as an exchange for the right to sell his product in the importing country. This mechanism is usually seen during high involvement and strategic purchases like defense equipment, aircraft, etc. At a macro level, it helps the importing nation to get its goods or resources purchased for a physical inflow. Such an exchange can be in the form of co-production, license, technology transfer, overseas investment, research & development, technical assistance, training, IPR, etc. Offset can be of two types as follows:

• Direct Offset - A situation where some components of an finished exportable product is manufactured in the importing country. The exporter is required to purchase such components from the importing country, assemble along with his manufactured components and sell the final finished product to the importer. Example, a French aircraft manufacturer sells a passenger plane to an importer in Pakistan and agrees with Pakistan that some of the spare parts of the plane will be ordered and purchased in Pakistan and will be attached to the plane. 

• Indirect Offset - A situation where the importer requests the exporter to enter into a long term industrial investment unrelated to the goods supplied by the exporter. Example, a French aircraft manufacturer sells a passenger plane to a Pakistani importer but here instead of buying the spare parts of passenger plane from Pakistan, the exporter agrees to rather invest in a chipboard factory in Pakistan, as chipboards are unrelated to passenger planes. 

Finance Facilitation for Indian Exporters

India is a country with abundant of minds visioning to step abroad to supply their work, be it any form. This has been made possible only because of the revolutionary changes existing in the system and growing tycoons. Whole of India knows organizations like Tata, Reliance, Maruti, Hero, TVS, etc. whose operations are spread worldwide. For making this possible, a nation should have a strong and trustful financial system backing the interests of its traders. Exports contribute to around 18.4% of India's GDP and hence, there is a need of crucial financial institutions and banks to bridge the fund gap. Some of such institutions are commercial banks, industrial development banks, export import banks, international banks, non-banking financial corporations, etc. Let's understand some of them.

I. Ubharte Sitare Programme

The Ubharte Sitaare Programme (USP) identifies Indian companies that are future champions with good export potential. An identified company should have potential advantages by way of technology, product or process. It can be supported even if it is currently underperforming or may be unable to tap its latent potential to grow. The Programme diagnoses such challenges and provides support through a mix of structured support covering equity, debt and technical assistance.

Objectives of the Programme

a) To enhance India’s competitiveness in select sectors through finance and extensive handholding support;

b) To identify and nurture companies having differentiated technology, products or processes, and enhance their export business;

c) To assist units with export potential, which are unable to scale up their operations for want of finance;

d) To identify and mitigate challenges faced by successful companies which hinder their exports;

e) To assist existing exporters in widening their basket of products and target new markets through a strategic and structured export market development initiative.

Nature of assistance

The Bank can support eligible companies by both financial and advisory services through:

a) Support by way of equity / equity-like instruments.

b) Debt (funded / non-funded): Term loans for modernisation, technology / capacity upgradation, R&D and balancing of production facilities by investment in activities such as:

• Machinery and equipment;

• Tools, jigs and fixtures;

• Testing / quality control equipment;

• Land and building.

c) Technical Assistance (TA) for product adaptation and improvement, cost of certifications, training expenses, market development activities including overseas travel for product/market development, studies relating to sectors, markets, regulations, Techno Economic Viability (TEV) study, etc.

Eligibility

a) Companies with unique value proposition in technology, products or processes that match global requirements.

b) Fundamentally strong companies with acceptable financials, and outward orientation.

c) Small and mid-sized companies with ability to penetrate global markets, with an annual turnover of up to approx. INR 500 crore.

d) Companies with a good business model, strong management capabilities, and focus on product quality.

e) Indicative Sectors: Automobiles and Auto components, Aerospace, Capital Goods, Chemicals, Defence, Food Processing, IT & ITeS, Machinery, Pharmaceuticals, Precision engineering, Textiles and allied sectors.

II. Export Credit Guarantee Corporation Limited (ECGC)

The Export Credit Guarantee Corporation Limited (ECGC) is an Indian government-owned company that provides export credit insurance services to exporters and banks in India. Here's a breakdown of its objectives, eligibility criteria, and nature of assistance provided:

Objectives of the Programme:

• To promote and support India's exports by providing a range of export credit insurance services.

• To help exporters to mitigate risks associated with non-payment by foreign buyers, political risks, and commercial risks, thereby enabling them to expand their export business confidently.

• To facilitate exporters in obtaining better credit terms from banks and financial institutions by providing insurance cover against potential default.

Nature of Assistance:

Export Credit Insurance: ECGC provides export credit insurance to cover risks associated with non-payment by overseas buyers due to commercial or political reasons. 

Pre-shipment Credit Insurance: ECGC offers insurance cover for pre-shipment finance extended by banks to exporters, thereby protecting them from the risk of non-repayment of such advances. 

Post-shipment Credit Insurance: This insurance covers risks related to credit extended by exporters to overseas buyers after the shipment of goods. 

Overseas Investment Insurance: ECGC provides insurance cover to Indian companies investing abroad against political and commercial risks. 

Buyer's Credit Insurance: ECGC offers insurance cover to banks providing buyer's credit to foreign buyers of Indian goods and services.

Guarantees: ECGC issues guarantees on behalf of exporters to banks and financial institutions to facilitate export financing and enhance exporters' creditworthiness.

Eligibility

ECGC's services are available to all exporters in India, including manufacturers, traders, service providers and MSMEs.

III. Small Industries Development Bank of India (SIDBI)

SIDBI stands for Small Industries Development Bank of India. It is an independent financial institution in India aimed at fostering, promoting, and financing the growth of small-scale industries (SSIs) in the country. Established in 1990 through an Act of Parliament, SIDBI operates as the principal financial institution for the promotion, financing, and development of the micro, small, and medium enterprises (MSMEs) sector in India. 

Objectives of SIDBI

1. Providing financial assistance: SIDBI extends various financial products and services to MSMEs, including term loans, working capital financing, equipment finance, project finance, and venture capital funding.

2. Promoting entrepreneurship: SIDBI supports aspiring entrepreneurs by providing guidance, training, and financial assistance to start and grow their businesses.

3. Facilitating technology upgradation: SIDBI encourages MSMEs to adopt modern technology and practices to enhance productivity, efficiency, and competitiveness.

4. Supporting sustainable development: SIDBI promotes environmentally sustainable practices among MSMEs by financing projects that focus on energy efficiency, pollution control, and sustainable resource management.

5. Facilitating policy advocacy: SIDBI works closely with the government and other stakeholders to advocate for policies and reforms that benefit the MSME sector and create a conducive environment for its growth.

Support extended by SIDBI to Indian Exporters

1. Direct Financing:

• Working Capital Assistance: SIDBI provides pre-shipment and post-shipment credit facilities to exporters. This includes loans for procuring raw materials, processing goods, packaging, shipping, and other export-related expenses.

• Term Loans: Funding for the acquisition of machinery, equipment, expansion, and modernization projects that support export production and capabilities.

• Foreign Currency Loans: Helps exporters meet expenses incurred in foreign currency, offering competitive rates and repayment terms.

• Equity Assistance: Limited equity participation to boost exporters' capital base and overall creditworthiness.

• Project Finance: Financing for export-oriented projects, providing comprehensive financial support for expansion and diversification.

2. Indirect Financing:

• Refinancing: SIDBI refinances loans provided by commercial banks and other financial institutions to exporters. This encourages more lending at favorable rates, enhancing access to credit for the export sector.

3. Specialized Financing Schemes:

• Receivable Financing (Factoring): SIDBI, in cooperation with ECGC, offers factoring services to exporters, ensuring quick liquidity and management of export receivables.

• Energy Efficiency: Financial assistance for projects focussed on technology upgrades and implementing energy-efficient practices within the export industry.

4. Capacity Building and Promotional Activities:

• Training and Consultancy: SIDBI organizes workshops, seminars, and training programs to enhance the knowledge and skills of exporters in areas like finance, marketing, and international trade regulations.

• Market Research and Development: Supports exporters in exploring new markets and identifying potential buyers through market studies and trade delegations.

• Collaboration: SIDBI partners with export promotion agencies and trade bodies to expand support networks and outreach initiatives for exporters.

IV. Export Import Bank of India

The Export-Import Bank of India, commonly known as EXIM Bank, is the premier export finance institution in India. Established in 1982 under the Export-Import Bank of India Act, EXIM Bank is wholly owned by the Government of India. Its primary objective is to facilitate India's international trade and investment by providing financial assistance, export credits, and other related services.

Functions of EXIM Bank:

1. Export Financing: EXIM Bank provides various financial products and services to support Indian exporters. These include pre-shipment and post-shipment export credit, export finance at concessional rates, and export credit in foreign currency. It also offers buyer's credit and supplier's credit to overseas buyers and sellers of Indian goods and services.

2. Project Financing: EXIM Bank finances export-oriented projects, overseas investment projects, and projects with significant export potential. It extends term loans, lines of credit, and project finance to Indian companies undertaking such projects abroad.

3. Trade Facilitation: EXIM Bank facilitates trade and investment by providing advisory services, market intelligence, and research reports to Indian exporters and importers. It also collaborates with international organizations, export credit agencies, and financial institutions to promote trade and investment flows.

4. Export Promotion: EXIM Bank supports export promotion activities by participating in trade fairs, exhibitions, and promotional events both domestically and internationally. It also offers promotional schemes and incentives to encourage Indian companies to explore new export markets and expand their international presence.

5. Risk Management: EXIM Bank helps mitigate risks associated with international trade and investment through various risk management tools and services. These include export credit insurance, guarantees, and hedging instruments to protect exporters and investors against payment defaults, currency fluctuations, and political risks.

6. Policy Advocacy: EXIM Bank engages with policymakers, industry associations, and other stakeholders to advocate for policies and reforms that promote export-led growth, competitiveness, and sustainability. It provides inputs and recommendations to the government on trade, investment, and export promotion policies.

Overall, EXIM Bank plays a crucial role in facilitating India's international trade and investment activities by providing financial assistance, export credits, and advisory services to Indian exporters, importers, and investors. It contributes to the country's economic growth, employment generation, and global competitiveness by supporting the expansion of India's trade and investment networks worldwide.