REPORT ON

Export Finance in
India
OVERVIEW, ISSUES AND CHALLENGES

Submitted by: Abhishek Pal C20-004 Submitted To:

Ankit Tilwani C20-031 Ramesh Subramanian
Avin Kothari C20-044
Diwas Prajapat C20-060
Sai Nandani C20-128
 CONTENTS

1) INTRODUCTION: 2-11
a) Concept of Export finance
b) Types
2) India’s Export Finance Institutional Framework:
a) RBI
b) Commercial Banks 12-25
c) EXIM Bank of India
d) ECGC
3) Role of EXIM Banks and credit agencies in export 25-27
promotion
4) Comparison with other countries:
a) Export Finance in China
b) Export Finance in Germany 28-35
c) Comparison with India
5) Challenges of Export Finance in India 36-37

6) Conclusion and Recommendation 38-43

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 INTRODUCTION
The concept of Export Finance:

Export Finance is the financial assistance provided by financial institutions for supporting
international trade. It includes the study of export credit institutions, foreign exchange implications,
and the methods of securing payments. It helps in understanding the foreign trade by better
financial assistance and hedging the financial risks.

Export Finance starts much before the goods has been exported and remains valid after the goods
has been exported to the overseas market. Export finance helps in getting credit facilities for
exporting of goods.

“With more competitions gaining momentum in the world market and with new
regulations introduced by the World Trade Organisation (WTO), it is important
that export finance plays a major role in increasing our country’s exports”

Export finance offers a way for businesses to release working capital, specifically from overseas
transactions, that might otherwise remain tied up in invoices for long periods of time. This type of
trade finance is very specific, tailored to suit the financial demands of companies who export trades.
It allows business to grow overseas. It also increases your trade with large foreign multinationals.

There are a lot of benefits to a business selling invoices overseas, but there can also be a lot of
financial risks as well. It is important to fully understand the risks and government regulations
before selling overseas.

Need for export finance:

Finance is important to exporters as selling the goods to the overseas market requires lot of credit
and the cost of delivery and logistics is also very high. Huge quantities of goods are sold in the form
of exports in the International Market. These exports require a certain amount of financial
assistance for the execution of the order. The finance depends upon the types of goods to be
executed and based on the overseas buyers. The amount can vary based on the requirement from
short term to long term finance. This financial assistance provided by financial institutions for the
export purpose is called EXPORT FINANCE.

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  Chart explaining export finance:

There are three key issues in the functioning of international trade finance:

 How does a company finance the production of goods destined for export, particularly if they
are bumping up against their current credit limits?
 How do they determine what payment terms will make their product competitive in
international markets, and how do they identify and deal with the related risks?
 When should they offer terms, and how do they do so without placing their balance sheet at risk
or compromising their credit policies?

Objectives of Export Finance:

• To cover commercial & Non-commercial or political risks attendant on granting credit to a

foreign buyer.
• To cover natural risks like an earthquake, floods Etc.

An exporter may avail financial assistance from any bank, which considers the ensuing factors:
o Availability of the funds at the required time to the exporter.
o Affordability of the cost of funds.

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 Advantages of export finance:

Export financing is a key competitive factor for exporters and may increase their opportunities for
signing a contract. There are several advantages for both importers and exporters in having the
Bank handle and finance the transaction.

 Advantages for exporter:

 Gains a competitive edge by offering to finance to prospective buyers

 Receives cash payment upon shipment or commissioning
 Does not tie up assets
 Avoids credit, currency and interest rate risks in the settlement period
 Does not need to use administrative resources to collect the debt

 Advantages for importer:

 Can use long-term financing to match expected revenues with expenditures, making cash
flow more efficient
 Obtain financing that is less expensive than local financing which may be subject to
restrictions
 Obtain additional savings on financing as exporters can use private insurance programs
which can make financing available at competitive rates
 Can obtain fixed-rate financing and be certain of the size of future payments

Types of Export Finance:

There are basically five types of export finance:

1. Pre-Shipment Finance:

Pre-shipment is finance required by an exporter before the shipment of goods to the foreign
countries for export. It is needed for the purchase of raw materials, processing packing,
transportation, warehousing, etc. It is also termed as self-liquidating finance as it gets liquidated
and repaid from the proceeds of export bills, when purchased negotiated and discounted.
Packing credit includes all type of facilities for all kinds of exporters.
It is a financial assistance of any sort provided by commercial banks to the exporter prior to
shipment of goods. It provides packing credit for the exporters. Pre-shipment credit also

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provides advance cheques drafts which represents advance payments. It basically includes all
type of costs for the purpose of manufacturing or packing of goods”.

Features of pre-shipment finance are as follows:

 Eligibility: Pre-shipment finance are available to all types of exporters such as merchant
exporters, manufacturing exporters, trading houses and other export units. They must
produce a letter from concerned export houses or other concerned party stating that a
portion of the export order has been allotted in his favor.

 Purpose: The packing credit is required by the exporter to meet working capital
requirements before shipment of good, such as payment of raw materials etc. The purpose
should be to meet working capital requirements for the business.

 Amount of Finance: Banks provide pre-shipment finance based on the following

activities:
 The nature of order
 The nature of the commodity.

The Pre-Shipment finance is categorized broadly as per following categories:

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 a. Back to back LOC: Back to back letter of credit consists of two letters of credits. Which are
used for the purpose of a financial transaction. One letter of credit is issued by the buyer’s
bank to the intermediary and the other by intermediary bank to the seller. Under this
arrangement the Bank finance an exporter by way of opening letter of credit for procuring
raw material with a view to manufacturing exportable goods as stated in the L/C received by
the exporter from an overseas buyer.

b. Export Cash Credit: Export cash credit is allowed during the pre-shipment process against
the company’s goods and products which are to be sold. This type of facility can be used by
an exporter for procuring and processing of goods. The export cash credit facility extends to
various products according to the goods and reputation of the exporters. There are various
kinds of ECC credits:

• ECC PLEDGE: All the goods are given in control to the bank

• ECC HYPOTHECATION: It creates a charge against the goods to the banks, but the banks
don’t control the goods and there is only hypothesis for it.

• ECC TRUST RECEIPT: It is issued when the goods are not in condition to be taken over by the
banks, so the banks issues trust receipt to the exporters so that the exporters act in good
faith for the bank.

c. Packing Credit: Packing Credit is allowed for making necessary preparation for shipment
of goods. This finance generally covers the cost of packing, transportation from warehouse
to the port for shipment warehousing, insurance. Packing credit provides low rate interest of
finance to the exporters to meet all the finance for exporting the goods. It reduces the
uncertainty for the payment from importers. Packing credit helps in increasing in flexibility
for the exporters.

Features of packing credit:

Self-liquidating
Credit to buy goods
Covers processing costs
Low interest rates

2. Post Shipment Finance:

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Post finance is the finance extended by the banks and other financial institutions after the
shipment has been done. All the finance is not given to the importers before the shipment of the
goods some part of finance is given after the good.

• Eligibility: Post-shipment finance is available to all types of exporters such as: Merchant
exporters, trading houses, manufacturer exporters and other export units. Shipping
documents indicating the fact that the goods have been actuary shipped for export purpose.

• Documents for post finance: Necessary documents substantiating the facility under
which the credit has been availed. Even, indirect exporters who export through export
houses/trading houses are eligible for post-shipment finance on the production of the
following documents:
o A letter from the concerned export house/trading house certifying that the goods
supplied by the deemed exporter have been shipped for export purpose.
o An and from the concerned export house/trading house stating that they do not wish
to obtain post-shipment facility against the same for the same transaction for the
same purpose till the original post-shipment finance is liquidated.

• Maintenance of Accounts, Monitoring and Repayment: As per the RBI directives,

the banks are required to maintain a separate account in respect of each packing credit. The
case of monitoring the accounts are same as in case of pre-shipment orders.

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 There are 3 ways through which post shipment finance can be done:
 Negotiation of Documents under L/C: Under this arrangement, after the goods are shipped,
the exporter submits the concerned documents to the negotiating bank for negotiation. The
documents should be negotiated strictly in accordance with the terms and conditions and
within the period mentioned in the letter of credit.

 Purchase of DP & DA Bills: In such a case, the banks' purchase/discount the DP

(Documents against payment) and DA (Documents against Acceptance) bills at the rate
published by the Exchange Rate Committee of authorized dealers. While doing so, the banks
should scrutinize all the export documents separately and minutely and clear instructions
are to be obtained from the drawer of the bill regarding all important issues related to the
negotiation of the bills.

 Advance against bills for Collection: Banks generally accept export bills for the
collection of proceeds when they are not drawn under an L/C or when the documents, even
though drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any
discrepancy in the documents, are generally negotiated by the bank and the exporter gets
the money from the bank immediately. However, if the bill is not eligible for negotiation, he
may obtain an advance from the banks against the security of export bills. Banks may give
advance ranging from 50 to 80 per cent of the document’s value.

3. Export finance against collection of bills: When export is made to different countries,
loan can be obtained from the bank against the bills sent for collection. As there are institutions
such as Export Credit Guarantee Corporation, banks will come forward to provide finance to
exporters. In case of a default, the guaranteeing company will indemnify at least 80% of
defaulted amount. While financing against the export bills, the banker will consider the FOB
invoice and not CIF invoice (FOB: Free On-Board invoice Price includes all expenses incurred until
the goods are kept on board the ship. CIF invoice includes costs, insurance and freight and so
this type of an invoice will not be taken by the banker for financing).

4. Deferred export finance: To enable the importer to purchase valuable goods, hire purchase
financing or lease finance may be arranged. There are two types of deferred export finance.
• Supplier’s finance; and
• Buyer’s finance.

Supplier’s finance in exporting: In the supplier’s finance, exporter’s bank will finance the
exporter so that he will sell the goods on instalment basis to the importer. The exporter will

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 receive the full value and the payment made in instalments by the importer will be received by
the exporter’s bank.

Buyer’s Finance in exporting: In buyer’s finance, the buyer is given credit under line of credit by
the exporter’s bank and the exporter will be made to export.

5. Export finance against allowances and subsidies: Exporters are given subsidies by the
government so that they can sell the goods on reduced price to importer. For example, cash
compensatory support is a subsidy given to the exporter by the government whenever there is
an increase in expenditure, due to reasons beyond the control of the exporter, such as increase
in transport cost or wage of the laborers.

Letter of Credit
Letters of credit, also known as "documentary credits," is the most widely accepted instrument for
the settlement of payments in international trade. The Letter of Credit is an arrangement whereby
the Bank, operating at the request of the customer (Importer / Buyer), promises to pay the goods or
services to a third party (Exporter / Beneficiary) on documents presented in accordance with the
requirements laid down.

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 Signing of the LOC:

Parties involved in a letter of credit (LC):

• Applicant / opener: the buyer of the goods/services (Importer), on whose account the credit is
issued.

• Issuing bank: the bank allotting the credit and undertaking to pay on behalf of the applicant in
conformance with the terms of the LC.
Beneficiary -the seller of goods/services (exporter) in courtesy of which the credit is issued and
who accepts payment on presentation of documents in agreement to the terms & conditions of
the LC.

• Advising bank-Banks suggesting the LC, which accredit the beneficiary's authenticity and is
usually a bank operating in the beneficiary's country.

• Confirming bank - A bank that, in addition to that of the issuing bank, adds its guarantee to the
LC initiated by another bank and thus assumes responsibility for payment
/acceptance/negotiation/ deferred payment based on the credit. A bank which, in addition to
that of the issuing bank, adds its guarantee to the LC opened by another bank and thus assumes
responsibility for payment/ acceptance/ negotiation/deferred payment based on the credit. It is
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 usually a bank operating in the recipient's country and therefore its guarantee adds to the
beneficiary's acceptability to the LC. This is being done at the demand/authorization of the
Issuing Bank.

• Nominated bank - Bank in the country of the exporter, which is explicitly authorized by the
issuer bank to accept, negotiate, etc.

• Reimbursing bank: Bank authorized to pay, accept or negotiate a bank's claim for
reimbursement. It is usually the bank with which the issuing bank has a Nostro account from
which the nominated bank is paid.

• Transferring bank: The first beneficiary may ask the nominated bank to transfer the LC in favor
of one or more second beneficiaries in a transferable LC. Such a bank is called a bank transfer.
The bank specifically authorized in the LC as a transfer bank may transfer the LC in the case of a
freely tradable credit.

There are several types of letter of credit:

1. Irrevocable LC- This LC cannot be withdrawn or amended without the beneficiary's consent
(seller). This LC reflects the Bank's (issuer) absolute liability to the other party.

2. Revocable LC- The Bank (issuer) may cancel or modify this type of LC at the instructions of the
consumer without the prior consent of the recipient (seller). After the repudiation of the LC, the
Bank will not be liable to the beneficiary.

3. Stand-by LC- This LC is closer to the bank guarantee and gives the seller and buyer more flexible
opportunities for collaboration. When the buyer fails to fulfil payment obligations to the seller,
the bank will honor the LC.

4. Confirmed LC- In addition to the LC issuer's bank guarantee, the Seller's bank or any other bank
confirms this type of LC. The Bank confirming the LC is liable for the performance of obligations,
irrespective of the payment by the Bank issuing the LC (issuer).

5. Unconfirmed LC. For the payment of this LC, only the bank issuing the LC is liable.

6. Transferable LC- This LC allows the vendor to assign part of the credit letter to other parties.
This LC is particularly advantageous in those instances where the seller is not the only
manufacturer of the goods and buys parts from other parties since it reduces the need to open
several LCs for other parties.

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 India’s Export Finance Institutional Framework

International trade typically takes place based on cash or short-term credit, without intermediation
through financial markets.

 Institutional Structure for Export Finance:

Trade finance is a crucial element in the design of trade policies. From time to time, the RBI has
undertaken several measures to ensure adequate and timely availability of credit for exports at
competitive interest rates. The Reserve Bank’s export credit refinance schemes have played a
pivotal role in this area. Commercial banks have been providing credit to exporters at pre-
shipment and post-shipment stages, both in rupees as well as foreign currency. The rupee
export credit has been generally available at rate of interest linked to the Prime Lending Rate
(PLR). The export credit in foreign currency is provided at internationally 13 Export Finance in
India: Issues and Challenges competitive interest rates linked to London Inter-Bank Offer Rate

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 (LIBOR) or similar interest rates. The RBI has been adjusting interest rates on rupee export credit
from time to time considering the need to maintain competitiveness by looking at interest rate
differentials, as also other factors like inflation and developments in financial markets. The RBI
has also taken measures to support institutional arrangements for export promotion, such as
policy initiatives to provide a liberalized environment for the operations of Special Economic
Zones (SEZ) units.

In most countries including India, commercial banks are by far the largest providers of trade
finance services. The main role of banks is to act as facilitators or intermediaries between savers
and borrowers. Banks provide short-term financing for trade transactions by various means,
including advances against (or discounting of) export bills. They also help to reduce the risk
inherent in trade transactions by providing documentary credit (e.g., letters of credit) services or
alternative methods of payment and by facilitating access to foreign exchange markets to hedge
against a possible currency risk. While private commercial banks make up the largest share of
trade financing activities, they generally tend to favor lending to well-established and larger
firms, or to the government, in order to reduce their risk exposure. As a result, small and
medium-sized enterprises may not find it easy to secure trade financing through traditional
commercial banks.

Exporters had lower risk exposures before 1990s, with limited buyer and country risks, given
that overwhelming share of exports were mainly destined to Europe and the United States.
However, the world dynamics have changed since the 1990s and exporters now require more
export finance products, including credit insurance and guarantees. Time has shown that the
impact of export promotion is not as much as the impact of the risk mitigating instruments.
Export finance can broadly be classified under two heads:

 Pre-shipment Finance: This includes (i) packing Credit, and (ii) Advance against receivables from
the Government like duty back, international price reimbursement scheme (IPRS) etc.

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 Post-shipment Finance: This consists of (i) Negotiation of export documents under letters of
credit, (ii) Purchase/discount of export documents, (iii) Advance against bills sent on collection
basis, (iv) Advance against exports on consignment basis, (v) Advance against indrawn balances,
and (vi) Advance against receivables form the Government like duty draw back etc.

Besides, the short-term trade financing above, banks on participation with Exim Bank, the apex
coordinating agency for export financing in the country, extend project financing (through
working group or otherwise) for export projects. Banks are also involved in issuance of letters of
guarantee (bid bonds, performance guarantees, advance payment guarantees etc.) on behalf
their constituents. The institutional framework also comprises of Export Credit Guarantee
Corporation of India (ECGC) Limited which, through its various policies and guarantees issued to
the exporters and banks, endeavors to minimize the risks involved in international trade
financing.

Export Import Bank of India is a public sector financial institution established on 1st January 1982
under export-import Bank of India Act 1981 for the purpose of financing, facilitating, and promoting
foreign trade in India. The institution is wholly owned by Government of India and provides a
comprehensive range of financing, advisory and support programs to promote and facilitate India’s
trade and investment overseas.
EXIM bank plays an important role for Indian exporters by ensuring that India’s exporters can
compete against foreign competitors based on the quality and price of their products and services.

EXIM bank tries to match the credit support that other nations provide to their exporters and
preventing them from enjoying undue advantage and make sure that an Indian exporter does not
lose sales because a foreign government has helped a foreign competitor by providing superior
financing terms to a potential buyer.

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15
As on March 31, 2017, the Exim Bank’s total Resources including paid-up capital of Rs 68.59 billion
and reserves of Rs 51.64 billion aggregated Rs 1,080.96 billion. The Bank’s Resource base, inter alia,
includes Rupee Bonds, Certificates of Deposit, Commercial Papers, Term Deposits, FC Bonds, FC
Loans and long-term swaps. During the year 2016-17, the Bank raised borrowings of varying
maturities (excluding raised and repaid during the year) aggregating Rs 404.08 billion, comprising
Rupee Resources of Rs216.04 billion and Foreign Currency Resources of US$ 2.90 billion equivalent.
As on March 31, 2017, the Bank had a pool of Foreign Currency Resources equivalent to US$ 11.47
billion. Exhibit 3 provides snap shot of financial highlights.

The Bank continued to maintain its stature and benchmarks in the international debt capital
markets. The Bank, during the year, tapped the deep capital markets of the USA in a debut US$ 1
billion issuance under Rule 144A. The maiden issue was well received by investors, with over 2 times
oversubscription and an investor allocation of 61 per cent in USA, which is the highest-ever for any
Bank / FI out of India. The Bank’s high domestic credit rating, and the international credit rating at
par with the sovereign, helps the Bank to raise resources at finer rates and pass on the benefits to
Indian exporters

Asset quality: As per the Reserve Bank of India (RBI) prudential norms for Financial Institutions, a
credit/ loan facility in respect of which interest and/or principal has remained overdue for more
than 90 days, is defined as a Non-Performing Asset (NPA). The Bank’s gross NPAs at Rs 99.62 billion
worked out to 9.24 per cent of the total loans and advances as of March 31, 2017. The Bank’s NPAs
(net of provisions) of Rs 48.03 billion as of March 31, 2017, were at 4.68 per cent of the net loans
and advances (net of provisions) as of March 31, 2017.

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The Capital to Risk Assets Ratio (CRAR) was 15.81 per cent as on March 31, 2017, as compared to
14.55 per cent as on March 31, 2016, as against a minimum 9 per cent norm stipulated by RBI. The
Debt-Equity Ratio as on March 31, 2017 was 7.99:1, as compared to 8.12:1 as on March 31, 2016.

Objectives of EXIM Bank:

• Financing of exports and imports of goods and services, not only of India but also of the third
world countries.
• Financing of joint ventures in foreign countries.
• Providing services such as value-added information for promoting investments and advisory
services.
• Provides loans/assistance for exporters (example Indian company) to perform export operations
to overseas markets.
• To provide technical, administrative and financial assistance to parties in connection with export
and import.

Functions of EXIM bank:

The functions of EXIM bank can be grouped under the following three categories:

• Fund based assistance: Providing direct loans to the exporters and overseas buyers to
facilitate international trade. This assistance can be further divided into three broad groups:

(a) Financial assistance to Indian Companies: EXIM bank provides loans and support to Indian
companies by giving them direct financial assistance to exporters, consultancy and
technology services, pre-shipment credit, overseas investment financing, etc.
(b) Financial assistance to Foreign Governments and Business firms: EXIM bank also provides
loans to foreign Government, companies and financial institutions by providing overseas
Buyer’s credit, letter of credit to foreign government, lending facility to bank overseas.
(c) Financial assistance to Indian commercial banks: EXIM bank provides loans to Indian
commercial banks to facilitate the credit facility provided to the Indian exporters to support
international trade.

• Non-Funded Assistance: EXIM bank provides non-financial services like issue of guarantees,
cover assistance, international consultant, Bid Bond, etc. Some of the non-funded services
provided by EXIM bank are:

(a) The issue of guarantees: EXIM bank supports commercial banks in India in the issue of
guarantees like advance payment guarantee, guarantee for retention money, performance

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 guarantee, etc. to support export contracts. The bank charges interest ranging from 7.5%-
12.5% p.a. for its export financing services.

(b) International consultant: EXIM bank helps in the creation and operation of financial
institutions in developing countries by sharing their expertise.

(c) Advisory and other services: EXIM bank guide Indian companies in signing contracts abroad,
what sources are available for their financing, and on global exchange control practices. It
provides access to Euro Financing sources and other global export credit sources to Indian
exporters. EXIM bank also provides advisory services relating to Marketing research,
merchant banking, Foreign exchange, risk syndication, dissemination of information through
publications.

ECGC was established by Indian Government in December 1983. ECGC is owned fully by
Government for promotion of exports. ECGC works under overall administration of the Ministry of
Commerce. It is handled by Board of directors who are representatives of the Government, RBI,
banking, insurance and export community. ECGC guarantees and covers exporters and provides
them with financing.

Function of ECGC:

• Provides several credit risk insurances to cover the risk for the exporters against loss/damage in
export of goods and services.
• Provides a guarantee to financial institutions and banks thus, helps exporters to obtain better
facilities.
• Provides Indian companies investing in joint ventures abroad with foreign investment insurance.

Services provided by ECGC:

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• It protects banks in India against risks of default or protracted delays in payment by the
exporters, in respect of export finance.
• Makes it simple for exporters to acquire to acquire export financing.
• Provide information about different countries though its credit rating.
• Helps the exporter to retrieve bad debts.
• Provide secondary services which are required for diversifying exports.
• To conduct various function which the Government wants them to do. This consists of providing
credit and guarantees in foreign currencies for importing raw materials required for
manufacturing of processing export goods.

ECGC helps exporters indirectly and assists them by helping them to get finance form the lending
institutions. This is done by ECGC by sharing risks with lending institutions through various policies
and guarantees. Policies of ECGC are mainly aimed for the protection of the interest of exporters
and the lending institution. ECGC also collects and shares the information regarding credit
worthiness of overseas buyers thus, helps the exporters to make an informed decision. Since banks
and financial institutions require guarantee ECGC introduced several financial guarantees, by which
credit can be granted to exporters, banks and financial institutions.

At what point should an exporter approach ECGC?

The time at which cover normally starts is from the date of Shipment proposal i.e. on the date of
dispatch, Shipment proposal for Standard Policy may be made at any time. For some policies ECGC
must be approached well before shipments takes place, preferably before materializing a contract.

ECGC's credit risk covers can be divided into four groups:

1. Standard Policy: The policy on shipments (comprehensive risks), usually referred to as the
standard policy, is well suited to shield risks in respect of goods exported on short - term credit,
i.e. credit not more than 180 days. The policy covers business and political risks from the
shipping date.

2. Other Specific Policies: Specific policies are designed to protect Indian companies from the
risks associated with the payment.
(a) exports beneath deferred payment terms
(b) services rendered by overseas parties and
(c) overseas turnkey and construction projects.

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These policies are declared distinctly for every distinct contract and usually cover risks arising after
the date of the contract. ECGC also has an insurance policy called Construction Works Policy which
covers an Indian contractor taking on a public construction work overseas.

3. Financial Guarantees: Financial guarantees are issued to banks in India to protect them from
the risk of losses pertaining to the extension of pre-shipment and post-shipment monetary
support. These also cover a broad variety of non-funded facilities stretched to exporters.

Export Performance Guarantee: a bank protection coverage that gives various types of
guarantees on behalf of exporters to promote export activities.

4. Special Schemes: Transfer Guarantee was designed to protect banks which produce
confirmation of letters of credit opened by banks present abroad, insurance cover for buyers '
credit and credit lines, and exchange risk insurance.

ECGC Whole Turnover Post-Shipment Guarantee Scheme

This is for protection if banks against the non-payment of post-shipment funds by exporters. In
support of export promotion, banks may reconsider to choose the post-shipment policy for the
entire turnover. The system's prominent features can be obtained from ECGC. Since the post-
shipment guarantee is essentially intended to serve the banks, the banks may consume the cost of
the premium in respect of the whole guarantee of post-shipment turnover and may give less or
none on to the exporters. If the risks are covered by the ECGC, banks should not reduce their
attempts to perform their duties on long-standing export bills.

Overseas Investment Insurance

ECGC has developed a plan to protect Indian investments abroad. Any investment in equity or
unrelated loan for the purpose of setting up or expanding overseas projects shall be eligible for
investment insurance coverage. Investments may be in cash or in the form of exports of goods and
services of Indian capital. The cover will be available for the original investment concurrently with
annual dividends or interest receivable.

The schemes cover the risks of war, expropriation and remittance restrictions. As the investor would
be engaged in the management of the joint venture, no protection for commercial risks would be
provided by this scheme. If investment in any country is to be qualified for investment insurance,
then there must be a bilateral agreement guarding investment of one country in the another. In the

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absenteeism of such an agreement, ECGC may think of providing cover, provided that the country's
general law gives adequate protection for investments

Financial guarantees of ECGC:

• Packing Credit Guarantee: It is for the exporters who need pre-shipment finance or loan for
arranging raw material required for manufacturing and packaging. This given to exporter by the
banks and ECGC issues guarantees for protection. It is given at pre-shipment stage hence a
confirmed export order or letter of credit is required to qualify for Packing Credit Guarantee.

It is issued against a proposal made for the purpose for a period of one year. If the pre-shipment
credit is not paid within 4 months of the due date of the loan, the claim is payable. ECIB (WT-PC)
“Export Credit Insurance for Banks (Whole Turnover–Packaging Credit)”, is issued by ECGC to banks
where a higher percentage of coverage is available at a lower premium as a large volume of
business is used to cover the guarantee.
Bank should notify the limit sanctioned to customer within the duration of 30days of sanction and
the bank should seek approval of corporation if they go exceed agreed value, known as
discretionary limit. Premium and cover varies from bank to bank which is approved by ECGC and it
ranges from 6 to 10 paisa per month per Rs. 100.
Guarantees of ECGC protects the bank against the following cases:

A. Non-delivery of shipping documents by the exporter to the bank: The guarantee provided by
ECGC for this purpose reimburses 66.67% losses incurred.

B. Non-payment of shipment debt: The guarantee issued by ECGC compensates bank for up to an
extent of 75% of the losses due to non-payment of debts.

C. (c) If credit is granted to small scale merchant exporter having turnover of less than Rs. 2 lakhs
and if such they fail to repay. ECGC provides the back up to 90% of the losses.

• Post shipment Export Credit Guarantee: Commercial Banks extend post-shipment

finance/credit to exporters. This is granted through negotiation, purchase, or discount of export
bills or advances against such bills. The post shipment credit guarantee providing banks against
failure to meet terms/non-recognition of export proceeds and the inability of the exporter to
repay the advances availed. ECIB (WT-PC) ‘Export Credit Insurance for Banks (Whole Turnover–
Packaging Credit)’, is also issued by ECGC on a full turnover basis, in which the bank's advances
to exporters are covered by the purchase, negotiation or discount of export bills or advances
against export bills sent based on collection. In this case, a higher percentage of coverage is
available at a lower premium.
21
The premium for this guarantee is 5 - 9 paise per Rs 100.00 per month and usually covers 60 - 75
percent. Where exports are covered by the exporter's individual policy, the coverage under the full
turnover guarantee rises to 75 - 90 percent.

The banks are protected against the following:

(a) Default or bankruptcy of exporter

(b) Violation of export contract
(c) Conflicts between exporter and importer

• Export Production Finance Guarantee: Taking incentive money from government takes
time. This claim can be made only after successful shipment of goods, and if exporters don’t
have funds to continue operations then this blocks the operation of exporters, commercial
banks helps exporters in this case by providing Export Production Guarantee which in turn
enables banks to extend credit at pre-shipment stage to the full extent of the domestic
production cost. Again, the bank will be reimbursed up to 66 2/3% of its loss from the
corporation.

In this case financial institutions and banks are protected by the ECGC against:

(a) Default or bankruptcy of the exporter.

(b) Any contractual loss 75% of the losses are born by the bank are compensated by
the ECGC.

• Export Finance Guarantee: If goods in the foreign market are sold at lower price, then it is
only when exporters receive enticement from government and export proceeds from importers,
he covers the full value of good comparable with cost of production. Export Finance Guarantee
covers banks ' post - shipment advances against export incentives in the form of duty
disadvantages granted to exporters. The losses covered by this guarantee amount to 75 percent.
While the premium is upward from 7.

• Export performance guarantee: Exporters are often required to provide the foreign parties
with a bank guarantee to ensure due performance or against advance payment or in lieu of
retention money. The export performance guarantee protects banks to 75% of the loss suffered
by the bank based on these guarantees. The exporter requires a bank guarantee for the
following purposes:

a) Bid Bond: Foreign buyer wants a tender. This guarantee is a kind of authenticity certificate of
the purchaser's offer.

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 b) Advance payment: After securing the bid, the purchaser may use a certain percentage of the
value of the export contract to pay the exporter in advance. This is made available to the
bank

c) Ensuring the performance of the contract: The purchaser requires this guarantee when the
exporter is awarded the contract. This guarantee ensures that his commitment to export is
fulfilled.

d) Payment of retention money: The purchaser may retain a certain percentage of the contract
money as retention money in order to ensure the performance of the exporter. If the bank
guarantee is given for this purpose, this money is released to the exporter.

e) Foreign currency loans: Exporters may sometimes have to raise funds in foreign currency to
finance their export project operations. Such a guarantee may be required by foreign
financial institutions willing to grant funds to exporters in foreign currency. Banks can issue
this guarantee to allow exporters to provide foreign financing institutions and receive funds
in foreign currency.

• Export Finance (Overseas Lending) Guarantee: If a bank which finances offshore

projects provides a foreign currency loan to the contractor, it can protect itself from the risk of
non - payment by the contractor by obtaining an export financing guarantee offshore, the
premium amount is payable in Indian rupees on such a guarantee.

Other Special Guarantees and Schemes:

• Transfer Guarantee: If a bank in India adds its confirmation to a foreign letter of credit, it is
obliged to honor the drafts drawn by the beneficiary of the letter of credit without recourse to
the letter of credit, provided that such drafts comply with the terms of the letter. If the foreign
bank fails to repay the amount paid to the exporter, the confirming bank will suffer a loss. This
transfer guarantee protects India's banks against the possible loss of such risks.

• Exchange fluctuation risk coverage scheme: The coverage beneath the scheme is
available for payment over a span of 12 months to a maximum of 15 years. For payments in
USD, Pound, Euro, Yen, Swiss Francs, UAE Dirham and Australian Dollars, coverage under the
scheme is available. However, the coverage may be extended at the discretion of the ECGC for
payments in other convertible currencies. The contract coverage provides a 2% franchise. Loss
or gain within a range of 2% of the reference rate will go to the exporter's account. If the loss is
more than 2% ECGC will make desirable the portion of the loss more than 2% and up to 35% of
the reference rate. Put another way, the exporters' account will receive gains/losses of up to 2%

23
 and beyond 35% of the reference rate. Gains or losses in excess of 2% and up to 35% will be
considered for by ECGC.

• Maturity Factoring: In addition to their financing needs, ECGC's full-fledged factoring service
provides the export credit guarantee for exporters. The factoring service covers the financing of
a series of transactions between the buyer and the seller and the collection of debt. In addition
to advancing cash flows from exporters, it also includes credit protection. Factoring applies if the
export has sales on an open account, the seller's past track record is clear in a continuous
relationship, the buyer is notified of the assignment and the sale does not involve countertrade.

ECGC provides factoring services that:

o Promotes the purchase of accounts receivable.
o Provides funding for approved transactions up to 90%.
o Total credit guarantee for default or liquidation of the buyer
o Helps sales library maintenance
o Supervise export income collection

Requirement for acceptability:

o Clean and good track record exports.
o Dealing with buyers on terms of the DA / open account.
o Pressure to execute unanticipated high-volume orders.

Exporters bearing large shortfalls in working capital through the financing of bills. The facility allows
exporters to take benefit of additional financing, reduces the necessity for export bills to be routed
through commercial banks and additionally eliminates the requirement for payment monitoring by
buyers. Export factoring also decreases the exporters ' administrative costs.

Risk covered by ECGC

ECGC covers commercial as well as political risks.

A. Commercial Risks:
• the buyer's insolvency
• the buyer's failure to pay within 2 months of the planned date.
• the failure of the buyer to receive the goods, without the exporter's fault, given that the legal
action against the buyer is recognized unwise.

24
 B. Political Risks:
• The pressure of restrictions on the buyer's country by the government or any government
activity that may block or hinder the transfer of payments by the buyer.
• The country of the buyer may be suffering from civil war, revolution, or civil disturbances.
• New restraints on imports or dissolution of a valid import license.
• Suspension or alteration of travel route outside India resulting in extra charges for freight or
insurance, which cannot be collected from the purchaser.
• Any other cause of loss outside India, which is not usually insured by general insurers and is
beyond the control of both the exporter and the buyer.

Risk not covered by ECGC:

The policy does not cover losses due to the following risks:
• In contrary to the exporter, commercial disputes, including quality conflicts raised by the buyer,
file a report in the court of law in the country of the buyer in his favor.
• Inherent problems with the nature of the goods.
• The buyer's failure to obtain the required import or exchange authorization from the authorities
in his country.
• The bankruptcy or liquidation of an exporter's agent or managing bank.
• Loss or damage to goods covered by general insurance.
• Variations in exchange rates.
• The exporter's failure to comply with the terms of the export contract or his negligence.

ROLE OF EXPORT IMPORT BANKS /EXPORT CREDIT AGENCIES IN EXPORT

PROMOTION

Specialized trade financing institutions have been an inseparable part of the financial sector in many
financially developed and emerging countries with comparatively high foreign trade sectors, Evans
and Oye (2001) identify three fundamental reasons for the public role in export financing. First,
export credit agencies (ECAs) / export-import banks (Exim banks) can support exporting companies in
order to compensate for possible market collapses, such as the lack of a proper financing alternative
for exports to high-risk destinations.

Exim Bank can compensate for possible market failures by directly providing export credits, by
collecting and sharing risk information and risk insurance. Second, ECAs may perform an important
role in the adjustment of credit conditions for non-financial externalities (spill over impacts of
domestic economic condition, national security expense, environmental externalities) resulting from
the breakdown of domestic non-financial externalities.
25
Governments have different conditions of access to public credit in order to consider these non-
financial externalities, strategic sectors subsidizing exports, refusing credit to countries deemed to be
at risk for security / foreign policy, granting subsidized credit to projects that are environmentally
sound or have notable positive externalities, and denying project not meeting desirable
environmental standards. Thirdly, there is a reason to offset the perceived unfair support of foreign
exporters through their governments and ECAs. For example, governments have complied with the
terms and conditions offered by foreign competitors in order to equalize the playing field for national
exporters, in order to discourage unfair export credit practices of competitors All three of these
reasons are contested, as regards the analysis of specific cases in which they may or may not be valid.
However, a typical export credit agency does not have a one-size model, since some operate from the
department of government and others operate as private companies.

ECAs or Exim Banks are governmental or quasi-governmental organizations and therefore their
support is often limited by the regulatory framework, including minimum requirements for local
content. They normally have three basic functions. First, they help exporters meet officially
supported competition for foreign credit. This is the case when foreign governments subsidies the
exports of their companies by allowing fixed-rate financing to buyers below the market, it is often
difficult for exporters to offer financing that matches the subsidized rates. Second, ECAs or Exim
Banks provide financing to foreign buyers if private lenders cannot or will not finance export sales,
even if the risks have been eliminated. Thirdly, ECAs or Exim Banks, and possibly their most important
function assumes risks beyond those that private moneylenders can assume. They enhance the
lender's ability to compete internationally in their country. It should also be noted that other
countries do not offer growth aid; other agencies typically fulfil this role. Most Exim banks / ECAs
share common characteristics in their application process, eligibility criteria, risk classification, terms
and pricing. They also have the same mission: Increasing exports and jobs while not competing with
the private sector. The similarities between ECAs or Exim Banks are the result of common business
practices and international arrangements such as the OECD Agreement (Economic Cooperation and
Development Organization).

ECAs or Exim Banks address two key risks associated with an export transaction. The first is political
risks, which refer to events that occur as a result of the government's political actions affecting the
buyer's payment. The second risk addressed by ECAs or Exim Banks is commercial, which refers to
non-payment as a result of bankruptcy, insolvency, prolonged default, fluctuation in demand,
unexpected competition, tariff shifts and/or failure to accept goods shipped under the supply
contract and other factors not covered by political risks. The ECAs or Exim Banks solutions provide
objectives for an exporter's five basic financing needs:

• Pre-export working capital;

26
 • Short-term export terms extended to importers;
• Medium- to long-term financing support to overseas importers;
• project financing and;
• Special export structures (e.g., leases, transportation financing, on-lending loan facilities, etc.)

Support for working capital from ECAs or Exim Banks significantly reduces the risk of a lender to
export goods or services. This support can also help to post credit letters required to secure
payments, post-bid bonds or other activities required in advance of an export sale. The primary
function of ECAs or Exim Banks is to protect the exporter from the commercial and political risks of
overseas sales. This can be done as a supplier credit if the ECA guarantees the importer's obligation
on terms extended by the exporter, or it can take the form of a buyer credit if the ECA or Exim Banks
undeviatingly support the importer's obligation.

Finally, ECAs or Exim Banks recognized the need to support turn-key solutions in support of project
financing and to tailor their support to meet the specific financing needs of specific industries. The
three forms of ECAs or Exim Banks support are:
• Insurance;
• Guarantees and
• loans/credit facilities

ECAs or Exim Banks provide exporters and financial institutions with a variety of export credit
insurance policies to reduce the risk of repayment of foreign debt due to civic and commercial issues.
For several reasons, lenders use these programs. By limiting the risk inherent in international lending,
ECA programs allow lenders to support their current customers in international sales, which they
would otherwise be unable to finance. These programs also encourage moneylenders to develop new
relationships with exporters and international buyers that can develop into profitable long-term
lending relationships and help exporters to meet two key financial requirements. First, ECAs or Exim
Banks help to obtain the financing of working capital needed for the production or purchase of their
export goods and services.

Creditworthy exporters sometimes find it challenging to secure such financing for several reasons:
because they have relinquished their borrowing capacity provided by the lending organization; the
lender has no affiliation with the exporter; or the lender will grant only specific portion of the loan
against the security of the exporter, thus limiting the cash resources of the company. Secondly, ECAs
or Exim Banks help exporters secure foreign buyers ' credit. The exporter often cannot complete the
sale unless it is reasonable to provide competitive financing. In some cases, if credit is extended, the
exporter could grow business with current clients.

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 Comparison with other Countries

Export Finance in China

Export Finance in China is the central approach to the “going-global” strategy as it facilitates domestic
companies to do business globally by mitigating commercial or political risks. Over the recent years,
export credit financing in China has undergone a tremendous shift by reaching values well above
those of the several developed countries. China has overtaken well developed countries like the
United States, Japan and European countries like France, Germany and the United Kingdom.

Export Finance helps China to promote three core objectives which are listed below:

 Ideological values
 Diplomacy
 Business

Diplomatic support for the One China policy is secured by export finance which involves diplomatic
recognition of China and rejection of Taiwan. China’s own development experience influences
Chinese engagement in other countries. A long-term agreement was signed between China and Japan
in 1978. According to this agreement, in exchange for Chinese oil and coal, Japan agreed to provide
low interest loans to finance export of USD 10 billion in industrial technology and materials to China.
This financing was utilized by the Chinese to hire Japanese firms to build China’s coal mines, main
transport corridors and power grids.

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This agreement between the Japanese and Chinese is mirrored in the natural resource backed loans
employed in Africa by China. In order to promote its own economic interests, China is providing
export credit financing to other countries like Africa. In this case, by providing export finance to
Africa, Africa can develop and become richer to afford Chinese exports, provide natural resources to
China and produce key investment opportunities for Chinese firms.
Most export credits in China is provided by policy banks created in the 1990’s before the country’s
WTO accession. The various Chinese policy banks which provide export credits are:

 China Export-Import bank (EXIM bank)

 China Export and Credit Insurance Corporation (Sino sure)
 China Developmental bank
 China Agricultural Development bank

The above listed policy-oriented financial institutions are fully owned by the Chinese government and
they have the mandate to promote Chinese exports and investment abroad.

A broad range of instruments are used by China to promote its exports and guarantee preferential
access to new markets and natural resources and to improve the import terms with the developing
countries.

The various instruments include:

• Export Seller’s credits: Export seller’s credits loans provided for Chinese companies operating
abroad. These non-profit loans are provided by China EXIM bank. The Chinese government
allocates money which forms the capital for the bank with the purpose of supporting Chinese
exports by helping them to earn foreign exchange currency and improving their competitiveness
in the international market.

• Mixed credits: Mixed Credits refer to a package financing mode which combines export seller’s
credit provided to a Chinese company together with the export buyer’s credit granted to a
borrowing country and concessional loans often offered for a specific project in the form of
foreign aid. This type of mixed credits is quite like the ones used by most OECD member
countries.

• Preferential export buyer’s credits: The subsidized credit provided to foreign borrowers to
finance their import of Chinese goods is referred to as preferential export buyer’s credits. These
credits can be offered at modest concessional rates around 3-6 % to support deals to China which
invoke interest and they usually have a grace period that goes from 3 to 6 years and maturing
between 8 to 12 years. These credits are always denominated in foreign currency.

29
• Natural resource-backed loans and lines of credit: Natural resource-backed loans and
lines of credit are loans/credit provided by China which are guaranteed by countries using their
natural resources with better terms and conditions than those available from traditional
banks/lenders. In most cases, the loan or credit is sanctioned when a Chinese company obtains
preferential access to the natural resources in a borrowing country.

• Concessional loans: Loans which are offered to developing countries at a subsidized interest
rate are called Concessional loans and they are usually tied to Chinese exports. They are
contingent on a certain percentage of Chinese goods being procured/bought with the loan. This
method allows Chinese companies to gain an advantageous entry into new markets and it is like
concessionary finance provided by traditional donors. This loan can be utilized to buy technology,
equipment, materials and services. The main criteria are that at least 50 % of it must come from
China. This loan has a maximum maturity of 20 years with a grace period of 3 to 7 years and is
denominated in the Chinese currency Renminbi. These types of loans are lent to Africa to finance
more than half of Chinese infrastructure projects within the continent.

• Direct government subsidies or export economic zones: In order to attract domestic

and foreign investment and to promote exports, the Chinese government identified special areas
within the country (China) and these special areas are called “Special Economic Zones”. A
significant administrative autonomy is enjoyed by the SEZ’s when it comes to policies dealing with
investment, taxation, pricing, labor and other related economic areas.
This includes better economic incentives such as 15 % corporate income tax on all enterprises
within the SEZ’s, compared to 33 for foreign owned enterprises and about 55% for state owned
enterprises outside the zones. Import taxes or duty is not applied on all the imported inputs used
in exports. In 2006, the Chinese government decided to establish up to fifty overseas economic
and trade cooperation zones around the world which involves three parties:
• Chinese Developers
• Local governments
• The Chinese government

The Chinese developers include both private and state-owned enterprises from China. The Zone’s
activities are regulated by the local governments and they provide incentives for their development.
The material and networking support is provided by the Chinese government for the zone
developers.
The impact of Chinese practices such as China’s concessional loans, export credits and SEZ have
played a strategic role in strengthening the economic relations between China and other developing
countries. This is important for China to get access to natural resources essential for its growing
economy, access to new markets for its manufactured goods and to spearhead itself to become a

30
global superpower. As a result of all these practices, Chinese trade deals with the developing world
have increased markedly over the past decade.

The major reasons for the success of Chinese export credits are the following:

• China has supported its companies through the Exim bank to invest in infrastructure, a sector
which is vital for developing countries, but it has often been neglected by Western economies in
favor of other sectors such as health and education. This is true in the case of African countries
where such projects have been considered unable to deliver an enough rate of return to offset
the investment risks.

• China’s policy banks provide support to Chinese firms’ entry into markets that tend to be ignored
by Western companies because they are too corrupt or risky.

• The Chinese banks offer loan terms with longer grace and repayment terms with lower interest
rates which are more favored. In comparison to western counterparts or ECA’s, China provides
export credit financing with almost no economic, political, environmental or human rights
conditions attached.

• The export credit from China represents an alternate source of unconditional financing for
countries highly dependent on western aid such as Mozambique and Ghana. They can also be
used as leverage against traditional donor demands.

• China is willing to transfer technology to its partner countries. By offering credit export
instruments, China contributes to increase partner countries’ trade volumes which helps in
economic development.

Thus, the Chinese export credit financing has remarkably increased over the years and it has now
become the leading export credit financing country in the world by reaching values well above those
of several OECD members (the US & different European countries).

Export finance in Germany

Exporters in Germany are not directly financed by banks there. They are financed through a credit
institution called AKA (Ausfuhkredit Gesellschaft mbH). AKA is a credit institute that has been
providing finance for German exports since 1952 and it is backed by 52 German banks. For long- and
medium-term export finance to Germany Democratic Republic, an organization parallel to AKA called
GEFI offers its services. AKA provides credit only on applications received from German banks for
export finance from their exporter customers.

31
AKA provides finance for supplier’s credit to the exporters under Plafond A & B and Buyer’s credit is
provided under Plafond C. A member bank from the 52 banks can apply to AKA under the Plafond A &
C for export finance. In case of Federal Republic of Germany, a credit institution can apply under
Plafond B to AKA for export finance for their exporter customers. The funds required for export
finance under Plafond A & C are available to AKA from the member banks. Under the Plafond B, AKA
gets refinancing from their central banking authority – Deutshe Bundes Bank under a special
rediscounting line.

The Federal republic of Germany, as a member of the European community, is also bound by the
guidelines for officially supported export credits called “CONSENSUS” which has been created by the
OECD member countries with the aim of limiting competition by means of credit terms. Its main aim
among other things to have minimum down payment and interim payments, maximum credit periods
and minimum interest rates.

HERMES Kreditversicherungs AG has been entrusted by the Federal Republic of Germany with
processing the exporters' and in case of buyer credits – the bank’s application for export cover. The
Hermes cover is available for a maximum for 5 years.

Hermes covers the following:

• Political risks: Nonpayment resulting from general government actions in borrowing country
like blockage of funds, prohibition on transfer of funds and from political wars.

• Production risks: Hermes covers for goods which require special manufacturing or long
manufacturing periods.

• Commercial risks: Insolvency of the foreign borrower/guarantor as well as protracted default.

• Foreign Exchange risk insurance: Incase if export contract is concluded in foreign currency,
exporter may apply for this cover. This cover is limited to US dollars, Swiss Francs and Sterling
pounds. The Hermes cover is compulsory while applying to AKA for any loan. The export proceeds
are used by exporters to for the repayment of the loans.

AKA, the credit institution for export finance provides finance to exporters under various schemes.
The application for export finance is routed through the principle banker of the exporter. The
application for export finance should contain the following details:
• Export transaction
• Export guarantee by Hermes

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• About the borrower

Finance to exporters is granted by AKA under various plafonds such as:

• Plafond A: It provides supplier’s and global credit. The amount of loan available depends upon
the expenditure incurred for production and payment terms agreed in the contract. The
maximum amount of finance available in this plafond is DM 2 Billion. Based on the
recommendation by the exporter’s bank, the margin kept for finance (10-15%) may be waived off.
Finance for global credit is available for a maximum of 24 months at a margin of 30 percent on a
small amount. In case, if the loan period exceeds 24 months, the finance will be covered by the
export guarantee of HERMES, which would be waived, if repayment is found to be certain. The
borrower has the option to choose between variable and fixed interest rates. Variable interest
rates are charged at a rate of 8 percent per annum and fixed interest rates are charged at a rate
of 7.815 percent per annum up to five years.

• Plafond B: Supplier’s credit to the exporters is provided by AKA under this plafond. A credit
institution in Federal Republic of Germany can apply to AKA for finance to their exporter
constituent, whether, they are a member of AKA or not. The loan period and the amount depend
upon the expenditure incurred during the production process and/or upon the payment terms
agreed in the supply contract. The maximum loan amount available in this plafond is DM 4 billion.
The margin under this plafond is 30 percent. The minimum loan period is 12 months and the
maximum loan period is 48 months. The variable interest rate for the credit finance is 5.75 per
cent per annum and the fixed interest rate is 6.5 per cent per annum fixed up to five years.

• Plafond C: Buyer’s credit is provided by Plafond C. This loan is confirmed by AKA using a
concluding agreement between AKA and foreign buyer or its bank. Plafond C is also available for
purchase of export claims covered by the guarantee from HERMES. Since most of the terms have
already been negotiated in an agreement, a general loan agreement or basic agreement is
concluded with countries like Algeria, Bulgaria, Czechoslovakia, Israel, Yugoslavia, Turkey, U.S.S.R.
and Hungary. The maximum loan amount available under Plafond C is DM 12 billion. The time
limit of HERMES guarantee determines the credit period. The guarantee from HERMES should
cover the loan, which may be waived if repayment seems certain. The loan under this plafond is
provided to the exporter against the certificate from the foreign buyer for the satisfactory
supplies. The various interest rates charged under this plafond are as follows:
o Variable interest rates at the rate of 8 per cent per annum.
o Fixed interest rates at the rate of 7.875 per cent per annum up to 7 years.
o Fixed interest rates at the rate of 8 per cent per annum up to 10 years.

33
Export finance under a combination of Plafond A & B is also given. The export proceeds are used first
to repay Plafond B loans. Supplier’s credits are to be repaid out of proceeds from the export
transaction concerned.

KfW IPEX-Bank is providing medium to long-term financing solutions as its core product and provides
in-depth industry expertise. This bank is responsible for providing financial support to the German
and European economy. The objective of KfW IPEX-Bank is to preserve and enhance the
internationalization and competitiveness of German and European export enterprises. It also finances
social and economic infrastructure in Europe and helps to secure the supply of raw materials and
supports the realization of climate protection and environmental projects all over the world.
Thus, around the world, Germany is the second largest export economy in the world and the third
most complex economy.

Comparison of Export Finance with China and Germany:

Capital is a key constraint to the operations and outlook of the Exim bank of India. In order to
function as an ECA, the Exim bank of India needs a high level of capital. In comparison to Exim India’s
total assets of about $15 billion, the China Exim bank has about $500 billion in total assets separate
from the assets owned by SINOSURE. According to the OECD, the world’s biggest class of public
finance institutions operating internationally are the ECA’s. Collectively they are bigger than the
entire world bank group and they fund more private sector projects in the developing world than any
other class of financial institution.

Export finance offered by China is mainly targeted at infrastructure, power, mines which are capital
intensive and therefore entail large import of capital goods from China. China’s financing of capital-
intensive infrastructure projects in mining, power, ports, railways have immensely helped it to
promote its capital goods exports.
The lack of colonial relationship between China and its partner countries, especially Africa shows that
Chinese engagement does not carry the baggage of the past, which could facilitate negotiations.

The reasons for the success of Chinese export credit finance for its penetration into the foreign
markets. It has extended to countries and sectors especially infrastructure which has often neglected
by the western economies in their aid strategies. Indian banks are not encouraged to lend to foreign
markets due to the poor return on export finance.

China has a more favorable financing terms than its western competitors and India. For example,
China’s EXIM bank loans have longer repayment and grace period with lower interest rates. This
makes export finance more flexible in China in comparison to that in India and other western
counterparts.
34
• Comparison of exports and imports:

35
 Challenges of Export Finance in India

Indian Micro, Small, and Medium Enterprises (MSMEs) contribute a significant percent to the
country’s Gross Domestic Product (GDP). In addition, these ventures play an important role in the
overall exports and employ a huge percent of the Indian population. The Government of India
constantly tries offering new policies to facilitate the growth of these businesses. Unfortunately, the
Small and Medium Enterprises (SMEs) continue to face many challenges. One of their biggest
challenges is access to funds to grow their business.

There are the several challenges faced by India:

• Lack of export finance institutions: Many developing countries do not have an effective export
financing system to take charge of the exports. This naturally puts a limitation on the ability of the
exporters to diversify and expand their exports. The failure to expand the exports arrests the
economic development of the country. This is a vicious circle.

• Access to timely and adequate credit facilities: Commercial banks offer different types of
financial products for the SMEs. However, the procedure to avail of these funds is very complex.
Generally, the lenders require the entrepreneurs to complete plenty of documentation and other
formalities, which is tough because they do not have adequate knowledge and understanding.
This delay and tediousness results in the SMEs being unable to avail of timely credit facilities.

• Lack of financial resources: Lack of financial resources of the banking system also puts a severe
limitation on the expansion of exports. The available resources are to be allocated among many
competing sectors with the result that the riskier types of exports may not find favor with the
banking system. The government of the country must step in here to ensure that enough funds
are made available to the export sector so that no worthwhile export suffers for want of finance.

• Availability of foreign exchange: For exports made on deferred payment terms, export credits
must be granted which would benefit the country in the long run in increasing its earnings of
foreign exchange. However, this reduces the availability of foreign exchange in the short run.
When goods produced for export have an import content financed on shorter credit terms than
those of the exports in which they result, the delay in the receipt of foreign exchange leads to a
current outflow of foreign exchange which aggravates the situation.

• High cost of funds: The high cost of the trade finance facilities offered by banks makes it almost
impossible for these businesses to avail of structured funds. The higher costs are directly
proportional to the greater risks perceived by the lending institutions. As a result, most of the
SMEs still depend on the unorganized lenders to meet their working capital requirements.
36
• Banking Structure: Inadequate banking facilities hamper export efforts too. Many banks do not
deal with financing of exports. The bankers at many centers lack the expertise of handling export
financing proposals. In developed countries like the United Kingdom, an exporter can get finance
from acceptance houses, discount houses, export financing companies, confirming houses, etc.
besides his bank. Developing countries do not have such a network

• Credit Information; Developed countries, who have gathered considerable experience in

financing exports, have a distinct advantage over developing countries as regards information on
overseas buyers and other related credit information. Invariably, it is difficult to find a 'data bank'
in developing countries where all the credit information is centralized.

• Statutory Requirements; The excessive liquidity requirements imposed by the central banks of
the developing countries restrict commercial banks* capacity to lend. For instance, in India, about
84 per cent of the banking system are required to be invested in statutory assets, procurement
advances and priority sectors, such as, agriculture, small-scale industries, etc.

• Dissemination of Information; There is no conscious effort to inform the exporters of all the
available facilities in the country. Thus, many businessmen who could be potential exporters
concentrate only in the domestic sphere.

The low understanding and demand for Export Finance in the country is partly the result of the low
risk and static export structure of the country. Export revenue is still dependent on traditional
exporters, products, markets and buyers with long standing relationships; along with the low level of
understanding the supply has also failed to respond to the emerging needs of non-traditional exports
and smaller exporters.

The variety, availability and sophistication of Export Finance solutions available in the market are
quite limited. While there is some availability of Export Finance instruments such as value chain
financing (VCF), export credit and payment default guarantee schemes, understanding of their
applications and adoption is weak and they remain underutilized.

The need for a proper system of export finance and export credit insurance cannot be over
emphasized because of the credit race witnessed in international trade.

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 CONCLUSION AND RECOMMENDATION

Trade financing is a critical tool for stimulating exports. Exporting companies in developing countries
such as India often cite lack of financing specially to meet the requirements of working capital-as a
key barrier to export growth. Credit access constraints are still an important barrier to exports even in
developed countries, as imperfections in credit markets increase the cost of transactions faced by
companies intending to export.
Governments provide trade credit and trade insurance managed by national export credit agencies in
order to address these market failures. In support of transactions between exporters and foreign
buyers, Export Finance focuses on providing payment, financing and risk mitigation solutions. Export
finance can play an important role in addressing some of India's key export challenges. The ability to
offer buyers better payment terms increases the chances for exporters to secure more orders. Export
Finance tools allow exporters to offer competitive payment terms to buyers while mitigating the
default risks and shortfalls in working capital resulting from such competitive payment terms.

Export finance providers

Export finance is supported by two main providers: Private sector banks and public sector financial
institutions specializing in trade financing (Export credit agencies / Exim Bank), which act
independently or on behalf of the government.
In addition to domestic financial institutions, multilateral financial institutions also provide solutions
to mitigate risks in support of international trade. However, institutions in the private sector tend to
focus more on short-term (up to one year) provision. They also tend to focus on financing exports to
lower high-risk and advanced markets in the economy. This is partly due to trade and country risk
assessment problems. In contrast to private banks, the government-supported Exim Bank tends to

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provide broader market coverage and offer short, medium and long-term financing options and
generally has special financing facilities to support exports from SMEs and exports to projects.

India has several financial institutions that can facilitate the use of export finance and promote it.
These include the Indian Export-Import Bank, ECGC (formerly the Export Credit Guarantee
Corporation of India), the Indian Foreign Trade Institute by offering courses in foreign trade
management, specialized studies in foreign markets and commodities. These institutions are
currently playing a limited role in facilitating and promoting export finance. This is partly due to the
low level of policy focus on export financing and their lack of coordination.

Information asymmetries
In the export-import trade, the problem is not primarily the availability of credit, but also the
information and misalignment between credit supply and demand due to an imperfect assessment of
risks by companies or an assessment of creditworthiness by financial institutions. Information gaps
and asymmetries are constraints affecting export finance demand and supply in the country.

India's export finance sector suffers from two types of information asymmetries: Firstly, there is a
lack of foreign buyers and market information, and secondly, there is a lack of awareness among SME
exporters of the instruments and benefits of export finance. The high cost of accessing information
from India on markets in Latin America, Africa and some parts of Asia CIS countries and buyers, tend
to overestimate and overpriced the level of risk. In addition, the low level of awareness among SMEs
of export finance leads to low demand and the use of even available export financing instruments.

Risk mitigation
Instruments for export finance help to mitigate the risks incurred by exporters in international trade.
Commercial risk and country risk are the main risks involved.
Commercial risk refers to the risk of non-payment by a purchaser or borrower in the private sector
resulting from default, insolvency or failure to take delivery of goods shipped in accordance with the
export order.

Country risk is the risk of government borrower/importer actions that prevent or delay the
repayment of export credits (e.g. foreign exchange restrictions, sometimes referred to as "transfer
risk") and other borrower country risks (e.g. civil war, physical disaster, etc.). There are also other
macro-risks; risks related to transport and logistics, foreign exchange risk and bank risk. These risks
also affect a buyer's ability to meet payment commitments in time.

Demand and supply-side restraints on export credit:

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Export finance in India is restricted by factors on the supply and demand side that prevent export
finance from playing a more proactive role in facilitating and promoting exports. This is reflected in
the low share of export financing for a total net credit, which is very low and does not correspond to
the share of exports in India's GDP by 18 to 20%.

The constraints on the supply side are institutional shortcomings and the limited portfolio of
instruments available in the market for export finance. The demand side limits partly the outcome of
the country's low-risk and static export structure. Export revenue depends on a few products, few
markets and few long-term buyers. This low-risk environment has led to low demand for innovative
financial solutions for exports. Established exporters have not preferred the diversification of markets
and buyers, changes in terms, etc.

The shift to new buyers and developing countries is a key issue in the diversification of products and
access to new markets. Firstly, higher commercial risks are accepted and secondly, higher country
risks are accepted. By mitigating these risks, export-finance can encourage Indian companies to
diversify from markets in developed countries to dynamic markets in emerging developing countries,
invest in new products and grow new buyers.

Innovative financial solutions facilitate the export of new products to new

markets:
India's exports have grown at an intensive margin; that is, more of the same products have been sold
to the same markets. This is a factor that limits the growth of exports. It is challenging to grow at a
large margin (i.e. by selling new products and accessing new markets). The premium for export
finance varies according to the conditions of the export credits their duration, as well as the credit
rating or risk status of the importer or the importer's bank and the importing country concerned.
When exporting to established buyers in advanced country markets, it is relatively easier to obtain
funding from private banks at reasonable rates. The cost and availability of finance become a greater
problem when it comes to exports to buyers in markets in developing countries where perceived
trade and country risks tend to be high. International banks generally apply strict credit ceilings for
countries and impose high-risk premiums on loans to developing countries.

The government can address this problem by providing solutions to export finance, which take some
of the risks that private banks are unwilling and unable to take, and by strengthening and expanding
market information (product/market) to help private banks accurately assess commercial and country
risks.

Four critical constraints on demand and supply related to information, institutions, instruments and
export structure prevent export finance from playing a more proactive role in facilitating and
promoting exports to India. The lack of credible, up-to-date and timely information on buyers and

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markets and the resulting risk assessment and overpricing of export finance solutions have a negative
impact. Lack of information on export financing instruments and their impact on benefits requires
export financing. The institutional shortcomings in terms of capacity, competence and independence,
as well as the limited portfolio of export finance solutions on the market, have a negative impact on
supply. The low-risk export environment of established large exporters with long-standing
relationships with established buyers in established markets can lead to low demand for solutions for
export finance.

The need for credible, updated and timely information on products and markets abroad the
information plays a critical role in facilitating a well-functioning export finance market and in
determining the ease of access to export finance and its costs. In order to assess risks, both exporters
and financial institutions need information. In order to accurately assess risks, reliable, accurate and
updated information about the exporter, the buyer and the market is critical. There can be fair
mitigation and management of risks that are clearly and objectively communicated and understood.
The absence of information and visibility tends to lead to overestimation of the risk, especially when
risk assessors have limited international experience, thereby inflating the price of risk mitigation
options. India's export finance sector suffers from two types of information asymmetries, firstly due
to limitations in information on buyers, markets and exporters, and secondly due to a lack of
awareness/information among exporters (especially in the small unorganized sector) about solutions
and benefits for export finance.

Facilitate services and information to find buyers and information on foreign markets is low and costs
are high, especially for emerging markets. This undermines the ability to evaluate trade and country
risks accurately. Therefore, lending institutes often base their risk assessment largely on the
exporter's track record, in which they trust the buyer's own due diligence. This means that it is
difficult for new exporters and SMEs to access export finance at a reasonable cost. The high cost of
financing results in low demand, low use of export finance solutions and lower participation of SMEs
in the country's exports.

Strengthen India's Exim Bank's lending capacity:

Global competition in medium-and long-term financing for export credit has become increasingly
formidable, with foreign competitors receiving significant support from export credit agencies in their
countries. India's Exim Bank plays an important role in equalizing the playing field for Indian exporters
by trying to match the credit support provided to their exporters by other nations, thereby
preventing foreign exporters from enjoying an undue advantage. This ensures that India's exporters
can compete with foreign competitors based on the quality and price of their products and services
and do not lose sales because a foreign government has helped a foreign competitor by providing a
potential buyer with superior financing conditions. It is imperative to strengthen India's Exim Bank's

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lending capacity to overcome intense and sometimes unfair competition. This would require these
initiatives:

• Domestic banks shall lend at least 12% of the advances in export credit. Commercial banks may
deposit the shortfall in export credit with Exim India at the bank rate in the medium to long term.
Exim India can exchange these rupee funds for dollar resources with Government of India.

• For the purpose of export financing, the foreign exchange reserves held by RBI may be used, if RBI
receives the same interest rates from Exim India as they would otherwise earn.

• The authorized capital of Exim India is Rs. 10,000 crores, while the paid capital is Rs 6,859 crore.
There is therefore room for improvement of paid-up capital. Capital infusion will allow the bank
to lend to exports many more times.

• Exim India as an institution must develop, expand and strengthen its scope as a major
international financial institution in support of international trade and investment, about exports
of projects from India.

State-owned or supported trade financing institutions must give financing and export insurance on a
"break-even" basis with the overall objective of promoting the country's exports. International
agencies such as multilateral development banks also provide solutions to mitigate risks in support of
trade.

Proper utilization of LOC extended by Exim Bank of India:

In order to facilitate access to target markets, it is necessary to strengthen credit schemes such as
bilateral lines of credit. This is a useful tool to facilitate trade with developing countries, especially
in Africa and Latin America, where the cost and access to credit for buyers in their own markets
can be a major barrier to international trade. These credit lines need rapid disbursement and
higher usage levels. The use of letter of credit across countries currently varies enormously. Due
to a combination of factors attributed to regulations/clearances in the host country and the
implementation agency/project exporter from India, use in some countries in Africa is very low.
Better use of letter of credit incentives importers/buyers in the country receiving a credit to buy
from the country providing credit rather than buying from another country. Most developed and
middle-income countries use this financing instrument to promote exports in developing and
emerging markets. There is also to ensure competition for LOC-funded projects between Indian
bidders. Much depends on the bidding process and the conditions of eligibility.

Limited portfolio of export finance solutions:

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Like many other developing countries, India's export finance market remains underdeveloped.
The use of available instruments for export finance is low. For example, the percentage of export
credit transactions covered by export credit guarantee/insurance is much lower than the
international average of 10-12% (Commonwealth (2014), Export Credit Insurance Industry
building capacity). The variety, availability and sophistication of market-based export finance
solutions remain limited. This is the combined result of a low level of awareness, a lack of focus
on policy and recognition of the role of export finance in promoting exports, a lack of government
initiatives, institutional shortcomings and the current low - risk and static export structure.

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