CHAPTER-VI This chapter is related to performance of finance institutions and guarantee institution involved in export finance in India the providing assistance and guarantee ever since to inception. The first part of this chapter deals with various schemes which are being operated by institutions for export finance. The second part of this chapter collocates the analysis of the assistance and guarantee and conclusions have been draw on in the third party. 6.1 Reserve Bank of India Being the foremost monitoring body in the Indian financial sector. The Reserve Bank of India has attracted a lot of attention since its establishment for export promotion and export finance, but it does not perform directly. Reserve Bank of India has evolved to prepare policies, measures, schemes etc. which are helpful for4 banks and institutions to grant short term and medium term credit to exporters. Besides these financial measures, it reduces the export duty for special or certain goods, The technical problems in licensing policy for those industries which involve in producing export goods, ensures the concessional rate of interest for export finance, prepares guidelines time to time and also change them in favour of banks and exporters. The Reserve Bank of India play an important role in assessment of priority for commercial banks, financial institutions so that no worth while \ export proposal may be missed due to in adequate export credit. - 143-
6:1.1 The RBI has introduced Severals schemes from time to time like export bills credit schemes, Pre-shipment credit scheme, export credit (interest subsidy) schemes, Duty draw back credit scheme and other supportive measures to increase and other supportive measures to increase bank landing to the export sectors and assist the export trade in general. The details of there schemes are like this. The bills market scheme was modified in October, 1958 under section 17(4)(c) of the RBI Act. to encourage commercial banks to extend export credits on a more liberal basis so as to included banks which were eligible for RBI assistance under the earlier scheme and authorized to deal in foreign exchange were eligibal also to borrow against export bills at the bank rate under the extended bill market scheme. Demand loans which are granted by scheduled banks against the security of usance export bills drawn on any abroad country and maturing within 90 days. The RBI treated there notes as eligibal security for advances under bill market scheme. The RBI agreed to bear half of the amount of stamp duty payable on bill market scheme. The RBI offered to bear 3/4 of the stamp duty from Januaryl959. In the same year, from Oct. 1959 the whole of the stamp duty was bom by the RBI. Under this bill market scheme the exporter and banks were not extended credit facilities due to two reasons. Firstly the credit period was to short and secondly exporters were not ready to excute usance provisionary notes and for RBI, it was not possible for the Reserve Bank to make advance or loans. Besides export 6:1.2 Export bills credit schemes:- -144-
credit assistance more than 90 days. Due to this problem the Bill Market Scheme was abolished in September 1962 by Reserve Bank of India and further the RBI was authorized to purchase and rediscount export bill maturing within 180 days and mode advances against eligible usance promissory notes which was maturing within 180 days. 6:1.3 To Overcome the difficulties a New section 17(3A) in corporate the act in 1962, according to this act the bank could make loans and advances to scheduled commercial banks against the promissory notes repayable on demand or on expiry of fixed period not exceeding 180 days. This scheme followed by the Export Bills credit scheme which introduced in March 13,1963 o). As per Scheme all scheduled banks which are authorized dealers in foreign exchange are eligible for credit facilities against their usance export bills having not exceeding 180 days, drawn in foreign or country currency and which are negotiated or discounted by the borrowing banks (2). On the basis of application of eligible banks, the RBI sanctioned limit for one year under this scheme and advance are available up to 100 percent of the amount of eligible bills. Interest charged on that amount at the bank rate or rate notified by the Reserve bank of India. The bank maintain a register for re-discounting against bill which earlier discounted by it. 6:1.4 Pre-shipment Credit Scheme This scheme was for commercial banks to make advances against promissory note repayable on demand or on the expiry of fixed period. This important scheme was introduced in February, - 145-
1969 o) under RBI Act. Sec 17(34). According to this scheme, commercial bank had to give a declaration to RBI that it had provided a Kumar pre-shipment advances or loan to an exporter. The new scheme neutralized the work for bank to convert the demand promissory notes into usance promissory notes under the Bill Market scheme. This Pre-shipment credit can be granted by way of pre-shipment advances for 180 days this time period consider from the date of the advances. When ever time was more than 180 days due to any reseanable cause of exports, the Reserve Bank of India approved the refinance during the extended period also. For this, banks were applied to Reserve Bank India for fixation of yearly limits for borrowings under the schemes under this scheme Re-finance was available up to 100 percent and was also outstanding loans on pre-shipment credit. Later on, RBI changed the lending policy from time to time so the Export Bills Credit Scheme and the Pre-shipment Credit Scheme has also been modified. 6:1.5 Policy Changes for Refinance In August 1967 the Reserve Bank of India revived the Bill. Market scheme due to different rates of Refinance and bank rate. The refinance was available at preferential rate as 4.5 persent in the case of engineering and metallurgical goods while bank provided advances for other goods at the rate of 6%. 6:1.6 An important facility, i.e. refinancing of medium term export credit available during the period January 1963 to Aug. 1964. This Refinance Corporation for Industry limited and provided for exporters on medium-term export credit in the -146-
private banks and have authority to deal in foreign exchange. This facility of Refinance combined with Pre-shipment and post shipment both and finance was available for periods exceeding 6 months but not more than 5 years. This facility was related to export of certain specified capital and engineering goods. 6:1.7 The interest rate of refinance at the rate of 6% which was in March 1968, reviewed in the context of the fixation in February, 1971. According to this revised, refinance facility was provided. Irrespective of the net liquidity ratio up to an amount equal to 10% the arrangement was available during the periods from 1971 to 1973 but in 1973, May 31, bank rate increased and reached from 5.5 to 7 percent. But soon thereafter one of the refinance facility on concessive rate withdrawn from July 13, 1973 and 6:1.8 In July 1974, the RBI withdrew the export refinance limits and charged the rate of interest at the rate of 10.5 percent from July 23, 1974 besides this refinance rates on export credit also increased to 11.5 percent. In June 1977 reintroduced which was withdrawn in July 1974, concessionary refinance at 10.5 percent was provided up to 50 percent of the incremental performance in export credit of a bank. In March 1978 the rate interest on export re-finance reduced by 0.5 percent. In April 1980 the rate interest on export re-finance reduced by 0.5 percent. In April 1980, the refinance was fixed at 50 percent of the increase in export credit. In the interest of the export promotion the rate of interest on refinance was reduced to 9% from June 1, 1981 but - 147-
due to increscent of Bank rate the refinance rate of export credit again increased and reached at 10 percent from July 18,1981 (4). 6:1.9 Export Credit Interest Subsidy Scheme :- Government of India felt that supply of export credit should be in lower cost. For this purpose, this Export Credit Interest Subsidy scheme was introduced by Government of India in the year 1968. The Government of India forced to the commercial bank to treat the export credit specially. Under this scheme, the ceiling rate of interest on pre-shipment and post shipmentis lower than maximum lending rate for other advances. In this way banks may suffer the loss but this loss due to lower rate of interest, the Government of India granted the subsidy to the banks, besides this ministry of commerce also grant out of Marketing Development Assistance Fund. In addition to this, special interest subsidy is also granted by the Ministry of External Affairs in respect of Certain special lines of credit extended to Malasiya, Bangladesh, Nepal for imports from India. The rate of subsidy was fixed at the rate of 1.5 percent, from 1968 to July 1986 (6). against this rate of interest was increased to 5 percent in October 1989 in pre-shipment and 3.8 percent in postshipment credit on cash basis. In Aug. 6, 1991 the Government of India abolished this scheme. Seeing the table 6.1 the total interest subsidy disbursed by RBI during 1985-86 to 1991-92 was Rs. 600.6-148-
Table-6.1 Export Credit Interest subsidy Disbursed by RBI - (Rs. in crore) Years General Interest Special Interest Total Subsidy Subsidy Subsidy 1985-86 24.7 6.3 31.0 1986-87 32.2 0.5 32.7 1987-88 44.9 0.5 45.4 1988-89 101.9 0.4 102.3 1989-90 - - - 1990-91 290.0 -. 290.0 1991-92 99.0 0.3 99.2 Total 592.7 8.0 600.6 Sources : Reserve Bank of India 1986 to 1991. -149-
Crore which included Rs. 592.7 crore general export credit interest subsidy under lines of credit for certain export to Malasiya and Bangladesh Rs. 8.0 actually it seen that the assistance under this scheme had been rising up during the period 1986 to 1992. 6.1:1Q Duty Draw back Credit Scheme:- Some goods are exported out of country at stipulated rates. This rates allowed only specific categories of goods. In respect of this, the exporters are entitled to customs, duty drawback laid down the Government of India. Such draw back entitlements considered more time in sanction and disbursement so Government decided an export promotion measure that a scheme should be evolved for grant of advances by banks to exporters against their duty draw back entitlements. This scheme was with effect from February 1, 1976, in which scheduled banks authorized up to 90 days. Such advances are full refinanced by Reserve Bank of India according sec 17(313) and period is considered 90 days from the date of the advance with free from interest. The payment of final duty draw back by custom authorities through concerned banks by cheques which turn repay to the RBI corresponding amount of the refinance availed of by them (5). 6:1.11 New Scheme of Export Financing:- 6:1.11 A Rediscounting of Export Bills abroad This facility is an additional window available to exporter along with the existing rupee financing schemes to an exporters at - 150-
Post-shipment stage. It covers export bills unto 180 days from the date of shipment. Under this scheme rediscounting the export bills in overseas markets by making arrangements with an overseas agency/bank by way of a line of credit or banker s acceptance facility or any other similar facility at rates linked to London Inter Bank offered rate for six months. Prior permission of the Reserve Bank will not be required for arranging the rediscounting facility abroad so long as the spread for rediscounting does not exceed one percent over six months in the case of re-discounting with recourse basis and 1.5 percent in the case of without recourse facility. 6:1.116 Options for the Exporters:- Now a days exporters can avail of Pre-shipment credit and Post-shipment in rupee and they can also avail the rediscounting of export bills in foreign currency under this facility exporter will try to avail any facility in a denominated foreign currency depending upon the premium/discount factor of the currency in which he has got exposure (6) 6:1.12 Others supportive Measures In addition to facilities. The Reserve Bank of India gives preference for export sector. It has not given preference not only refinance against export credit but also in relaxations in interest charge by the bank. One of the important measures relates to relaxation in the credit Authorization scheme. This scheme is not applicable to sanction of credit facilities for Post-shipment credit since July 1968. To sanction, the banks have been asked credit -151 -
limits for domestic business or for export purposes. Where as the limit authorized for domestic business can be made available by banks freely for export purposes. Yet another measure is also available to export credit by the Reserve Bank of India which is relating to the exemption from application of panel rates of interest with the help of these supportive measure, commercial banks do not delays in granting procedure and delay in payment yet accept with charge of interest. Bank extending export finance should, in addition to RBI guidelines have a through knowledge of trade policy, procedures and directives of trade and exchange control provisions, international trade practices, particularly those of international chambers of commerce, like uniform customs and practices for documentary credits 500, uniform Rules for collection URC-522, etc. and the pulse of the local as well as the international markets (7). 6:2 Commercial Banks For economic growth, export growth is a must and for export growth liberal and cheaper export credit is essential. This assumption can be achieve with the participation of commercial banks. Prior to Independence of the country finance of exporters was provided mainly by exchange banks. After Independence RBI started to provide export finance flow in short term, Medium.Term and long term through commercial banks. Commercial banks were allowed to borrow against the export bills at the banks rate after modification of Bill market scheme. Unfortunately the banks were not used this scheme due to some -152-
problems of the exporters to draw usance bills. In respect of this, the commercial banks were provided relaxation that either the party cover the exchange risk or maintain the accounts with margin not less than 25 percent of exporters bills drawn in foreign currency. This scheme failed on the basis of covering risks, margin amount in loans account and its security so this facility was with drawn. But Reserve Bank of India allowed to commercial banks to buy and re-discount export bills maturing up to 180 days and provide advances against usance promissory notes which may be mature within 180 days. This facility was given by Reserve Bank of India after recommendation of the study group on export finance which was appointed by the ministry of commerce and Industry in Sep. 1962. The Reserve Bank of India re-introduced the pre-shipment credit scheme and granted credit to the commercial banks for their promissory notes either on foreign currency or Indian rupees. 6:2.1 Export Credit Scheme In India, the licensed commercial banks generally extend to exporters short term credit facilities at pre-shipment and postshipment schemes. According to Foreign Regulation Act only scheduled or licensed commercial banks are allowed to deal the Foreign Exchange business. Pre-shipment finance or packing credit is generally provided by scheduled commercial bank to the ex-porters for their working capital requirements between the time of the receipt of 1. Pre-shipment Credit Scheme:- -153-
order from an overseas buyer and the time of shipment to arrange for production and procurement of goods (8). The Commercial banks provide packing credit under the schemes v.i.2 packing credit to sub-supplier, running account facilities, packing credit facilities to Deemed Exporters, Pre-shipment Credit in foreign currency, Packing credit facilities for consultancy services and advance against cheques/drafts received as advance payment. These facilities have been detailed in chapter-iv mechanism of export finance. 6:2.2 Period of Credit Commercial banks grant export credit to the exporter for short term basis not excluding 180 days from the date of disbursement of loan. But in special cases the Reserve Bank of India extends the credit period more than 180 days. This export credit can be availed by exporters after receiving of letter of credit or Firm export order, some times Reserve Bank of India permits the export credit without documents but exporters gives the under taking for this, 6:2.3 Amount of Credit Actually the amount of credit depends upon the F.O.B. value of goods and incentives there of such as cash compensatory and Duty drawback scheme or on the basis of other facilities. For this the ECGC has setup the norms under the export production Finance Guarantee scheme i.e. 50 percent over and above the F.O.B - 154-
Table 6.2 Interest rate structure for Pre-shipment export credit Rate in % Export credit 1992 1998 1999 2000 2001 2004 2006 i) UP to 180 days 15 9 10 10 10 <BPLR -2.5PP BPLR -2.5PP ii) Beyond 180 days and 13 up to 270 days 17 12 13 13 <PLR+ Free Free 1.55PP iii) Against incentives receivable from 15 9 10 10 10 <BPLR <BPLR Government covered by ECGC Guarantee up to 90 days. -2.5 PP -2.5 PP -155-
value of product subject to a maximum of 100 percent of the domestic cost of the export product. This packing credit may be in the form of loan, cash credit and over draft. 6:2.4 Rate of Interest The rate of interest is charged by commercial banks at concessional rate for Pre-shipment credit than normal lending rates on other loans. Actually, the rate of interest depends on the currency in which Pre-shipment credit is granted terms of payment period of maturity etc. 6.3 Post-shipment Credit Post-shipment finance requirement relates to exporters needs after the goods are shipped till the actual payment is received. But payment clearing more time and in this transaction there is a huge amount of exporters blocked. For this problems, commercial banks launched a number of schemes to provides Post-shipment finance to exporters. These schemes are- (i) Export Bills Purchased/Discounted (ii) Export Bills Negotiated. (iii) Advance against export bills sent on collection basis. (iv) Advance against exports on consignment basis. (v) Advance against undrawn balances and. Advance against Duty Draw back. There schemes are also discussed in details chapter-iv so Researcher is not in need of explain again. - 156-
6:3.1 Period of Credit :- Period of Credit is divided into three categories v-i2 short term, medium term and long terms, short term period is 6 months i.e. provided by commercial banks. 6:3.2 Repayment of Post-shipment Credit :- Repayment of loan starts when the payment from abroad is realized in conformity with the terms of sales. This Policy arises more risks so ECGC cover against such risks. Actually these schemes are for exporters who sale their goods and services on credit basis. 6:3.3 Commission and Interest:- Commercial Banks charge a commission according to the rates prescribed by the Foreign Exchange Dealers Association, generally, the rate of interest charge upto 120 days. Thereafter at rates decided by the Reserve Bank of India Table - 6.2 shows the rate of interest. - 157-
Table 6.3 shows rate of Interest for Post-shipment Credit Post-shipment credit Rate in % 1992 1998 1999 2000 2001 2004 2006 (1) Demand Bills for transit period 15 9 10 10 10 (2) Usance Bills (a) Upto90days. <BPLR -2.5PP BPLR -2.5PP 9 10 10 <10 99 99 (b) Beyond 90 days and upto 6 months (c) Beyond 6 months (d) Upto 365 days Gold card scheme (3) Against incentives receivables UP (90 Days) (4) Against Undrawn balance upto 90 days 24 13 12 12 12 Free Free 15 20$ - - - - - - - - - - BPLR -2.5PP BPLR -2.5PP 15 9 10 10 10 <BPLR -2.5 PP <BPLR -2.5 PP 15 9 10 10-10 99 99 (5) Against relation money (For supply 15 9 10 10 10 99 99 Portion only) Sources Through Internet www.com.rbi.appendx3 BPLR - Bench mark Prime Lending Rate PLR - Prime Lending Rate -158 -
Table-6.4 Export Finance By Banks Out-standing (Rs. in Crore) Year Outstanding Export finance by Bank Total Bank Credit outstanding (Gross) Cal I as % of Cal II 1982 1726 34491 5.0 1983 2042 40454 5.05 1990-91 9186 11,7932 7.8 1991-92 10261 12,6006 8.1 2000-01 43321 68335 63.3 2001-02 42978 - - 2002-03 49202 80179 61.3 2003-04 57687 94849 60.8 2004-05 69059 2,08,204 33.1 2005-06 86207 387774 22.23 Sources Economic survey 2006-07 Page - 115. -159-
Analysis of the Assistance Table.6.4 present total, out standing amount of export credit by commercial banks. Total (Grass) export credit at the end of 2005-06 at Rs. 387774 crore against Rs. 34491 crore 1982. It is increased total gross bank outstanding by Rs. 353283 crore while outstanding export finance by bank increased by Rs. 84, 481 crore on the basis of table total bank credit outstanding by 91% while outstanding export finance increased by 97%. The notable feature is that the both absolute amount of outstanding export credit by banks and its relatives shares in the total bank credit in the country were with a rising trend over the period of the study. But year 2004-05 and 2005-06 shows decline of outstanding percentage of outstanding export credit it is due to consensus of commercial banks. In addition to funded assistance commercial banks also provided non funded assistance which includes issue of bid-bonds and participation in different types of exporters guarantee along with Exim Bank and ECGC. Export Credit Guarantee Corporation of India Ltd. (ECGC) The basic objective of ECGC to cover the risk of Indian exporter against non-payment of export transaction by foreign - 160-
buyers and to extend financial guarantees to banks extending credit to exporters. For this purpose, ECGC has been offering a number of services and Policies for insurance and guarantee covers. This services may be divided into four groups viz. (1) Standard Policies (2) Special Policies (3) Financial guarantees and (4) Special Schemes. (1) Standard Policy i- This Policy is suited for raw material consumer goods and consumer durables so that continuous supply of the some product or services may be available through out the year. This Policy covers both Political and commercial risks for 180 days only. To cover standard Policy ECGC has designed four types of standard Policy for shipment made on short term credit. They are- 1. Comprehensive Risk Policy covers both political and commercial risk from the date of shipment. 2. Political risks Policy to cover only political risks from the date of shipment. 3. Contract Risk to cover political and commercial risks arises from the date of the contract or 4. Contract Political Risks to cover only Political risks from the date of contract. Export credit guarantee corporation pay the loss at the rate of 80 percent to 85 percent only on the certain basis or conditions like insolvency of the buyers, default in payment by the buyer, accepting of goods internal political disturbances, import restriction any other kind of loss occurring out side India. It does not cover risk arise due to disputes raised by the buyers failure to -161 -
obtain the necessary exchange authorization insolvency of banks and fluduations in exchange rate etc., payment may exceed to 95 percent for Political risks in respect of large export orders. The corporation operates the following specific policies - (2) Specific Policies This policy is suited contracts for export of capital goods or services which are not fulfill the insurance policy. ECGC pays 90 percent of the loss from both commercial and political risks. The corporation operates the following specific policies - (a) Specific shipment (comprehensive risks) Policy provides cover against all types of risk as in the case of standard policy this policy is suitable in case where both political and commercial risks exist at the post-shipment stages. (b) Specific shipment (Political risks) Policy covers political risks at the post shipment stages. (c) Specific contracts (comprehensive risks) Policy and (d) Specific contracts (Political risk) Policy the above policy covers losses at the pre-shipment stage. (B) Insurance cover for Buyer s Credit and line of credit This policy is related to financial institutions those are authorized to lend foreign buyers and institutions which import capital goods from India, ECGC has involved the scheme to protect financial institution which extend this type of credit Insurance agreement is drawn up on case-to case basis. (C) Service Policy -162-
Under this Policy there are a wide range of services like technical, professional or trained hiring services etc. The service policy covers such contracts under which only services are to be rendered, contracts under which rendering of services is part and parcel of a bigger contracts for supply of the goods, machinery erection of a plant etc. (D) Construction work Policy This Policy covers risks for all payments that fall due to the contractor under the contracts. BCGC provide insurance for those civil construction jobs and Urn key projects involving--supplies and services. In the case of contracts with privates buyers the policy may be issued to cover only political risks, and policy consider the insurance from the date of the contract. (3) Financial Guarantee Financial institutions like exim bank and commercial banks provide export finance to exporters but ECGC protects with guarantees from loss on account of their lending to exporters. The following financial guarantees are provided by the exporters. Financial guarantees provided by ECGC 1 Pre-shipment export Finance guarantee 2 Export Production finance guarantee 3 Post-shipment export Credit guarantee 4 Export Finance guarantee 5 Export performance guarantee 6 Export Finance cover seas lending guarantee - 163 -
ECGC gives protection to bank against losses due to nonpayment by exporters on account of their insolvency or default. It pays three fourth of the loss in the case of Post-shipment export credit and overseas lending guarantee and two-third of the loss in the other cases. The corporation agree to pay maximum the losses of banks which offer to cover Pre-shipment and Post-shipment finance fully on the basis of whole turn over. (1) Packing Credit Guarantee This advances is provided by bank to the exporter against LC or firm order for the purpose of purchasing manufacturing process and final packing of goods meant for export. In this guarantee, ECGC covers 66.67 percent for individual at the premium rate of 10 Paise/Rs. 100/month. Calculated on the highest amount outstany for the month. In the case of WTPCG (whole turnover packing credit guarantee) ECGC covers 66.63 percent for exporters of perishable and hazardous goods at the Premium rate of 7 Paise/Rs. 100/Month. Calculated on the average amount outstanding for the month for others it covers 75 percent and for small scale exporters is 90%. Some times the cost of production exceeds the FOB value of export contract/order in case of certain commodities and the difference is compensated by Government as incentives. The difference representing the incentives receivables. The extent of cover is 66.67 percent and the premium rate is 10 paise/rs. 100/Month calculate on the highest amount outstanding (2) Export production Finance Guarantee:- -164-
for the month. In the case of WTPCG bank covers the benefits of higher cover and lower premium rate as applicable to WTPCG in respect of EPFCGS obtained by them. The bank provides finance given to exporters to purchase, negotiation or discount of export bills or advances against such bills qualifies for this Guarantee. For this guarantee exporter concerned should hold suitable policy of ECGC to cover the overseas credit risks. It covers 75 percent for individual Guarantee with Premium rate 7 paise/rs. 100/month calculated-on the highest. If export bills sent on collection and exporter holds SC Policy with LC exclusion it covers 60 percent when risks is 75 percent at the premium rate 10 paise/rs. 100/month calculated on highest amount outstanding for the month it is not necessary that exporter holds SC Policy. For whole turn over packing credit guarantee, exporters packing credit guarantee, exporters have to keep SC Policy. For whole turnover packing credit guarantee, exporters have to keep SC Policy than 90 percent risks covers at 4 paise/rs. 100/month for small exporters and 85% for others. It exporters have not hold SC Policy. 65 percent covers by ECGC to small scale exporters at the rate of 5 paise/rs. 100/month, calculated on the average daily product basis, others are entitle only 60 percent. (4) Export Finance Guarantee It covers Posf shipment advances granted by banks to exporters against Government incentives receivable from (3) Post-shipment export credit guarantee:- -165-
Government in the form of cash incentives or duty draw back, IPRS etc. Under this guarantee only 75% is covered at the 7 paise/rs. 100/month calculated on the highest outstanding for the month. Banks having WTPCG/WTPSG are eligible for concessional premium rate and highest coverage. (5) Export Performance guarantee It is also known as bid bonds, performance guarantees advance payment guarantees duly guaranteed by a Bank in India at Various stages of export performance, therefore, obtaining import license for raw material or capital goods, exporters may have to execute an undertaking to export goods of a specified value within a stipulated time, duly supported by a bank guarantee (9). In the case of short term 75 percent and 75 percent to 90 percent for medium and long term finance respectively. The rate is 0.9 percent per annum on the amount guaranteed for short term. For the Medium term and long term the rate of premiums are 0.8% per annum on the amount guaranteed for 75% cover and 0.95 percent per annum on the amount guaranteed for 90 percent cover. (6) Export Finance (Overseas Lending) Guarantee e If a bank financing overseas projects, provides foreign currency loan to the contractor, it can protect it self from the risk of non-payment by the contractor by obtaining export Finance (overseas Lending) Guarantee. Rate of Premium will be charge 0.90 percent per annum 75% cover and 1.08 percent per annum -166-
for 90% cover. Premium and claims under this guarantee will be paid in Indian Rupees. (4) Special Schemes In addition to the. above guarantee schemes, ECGC has launched following special schemes. (1) Exchange Fluctuation Risk Cover This scheme launched for Indian exporters who suffer the payment against export of goods and services due to exchange fluctuation and schedule runs for payment in a number of years. ECGC covers the risks of payment which is received beyond 12 months from the date of the contract. Beside this, exporter can terminate the insurance contract after three years after giving the notice of three months. Under this scheme payment is in US dollar, Yen, Pond, French Swiss France, UAE Dirham and Australian Dollar. The rate of Premium is Rs. 40 paise per Rs. 10/ per quarter for the bid cover and the total premium is payable at the time of issue of the policy. (2) Overseas Investment Insurance Agreement ECGC has evolved a scheme to provide protection for Indian investments abroad. Any investment made by way of equity capital or united loan for the purpose of setting up or expansion of overseas projects. This risk arises when exporter export to under developing country. ECGC cover mainly against the loss of investment due to political reasons. The period of Insurance normally exceed 15 years if the project is related with long period the maximum covering period will be 20 years from the date of commencement of Investment under this scheme, the -167- i
percentage cover is 90% and rate of premium is 1 percent per annum. (3) Transfer Guarantee i- This guarantee covers the risk which raise due to insolvency or default of the L.C. opening bank or due to certain Political & Commercial risk, such as was or due to moratorium which may delay or prevent the transfer of funds to bank in India. When cross due to political risk is covered upto 90% and loss due to commercial risk upto 75%. Rate of Premium will be charge at rates normally applicable to ECGCS Policy covering export of goods. (4) Lines of credit Under this scheme, when foreign Government or a financial institution demand loan for importing specified range of goods items from the country. ECGC is evolved from 1976 and protect the exporters of its country. Buyer s Credit Many financial institutions of other countries like India providing direct finance to buyer or financial Institution for importing capital goods from India. Such type of finance is consider may be form of buyer s credit. This buyer credit advances to the exporter immediate and free them from the problems of credit management as well as loss arises due to overseas credit risk. ECGC also cover the risk of financial Institution from loss of such credit. After having discussed various important insurance Policy and credit guarantee schemes of the Export credit guarantee -168-
corporation, we now proceed to analysis the overall business of the organization. Policies Issued Table 6.A present the number and maximum liabilities covered under the standard Policies. As is apparent from the table the total no of Policies issued during the 8 years period taken as whole was high as 59554. Covering maximum liabilities of Rs. 11456584 lacks. This table also reveals that standard Policies had been an important business of the corporation. It is seen that only 12.5 percent of maximum liabilities were in forced while no of Policies issued 59554 lacks. This High rate of maximum liabilities issued and enforced very low liabilities. In year 2000-01 the no of Policies issued 6858 and during eight years it reached at 10244 it means no of issued Policy increased. Year 2006-07 issued no of Policies 10867 while the world is was facing the problem of recession. In the case of force, no of Policies in year 2000-01 was 2452 and maximum liabilities was 1946724. While year 2007-08, no of Policies reached 4223 and maximum liabilities was 2944344 lacks. Thus standard policy in short term business higher than that of the standard Policies issued. -169-
Table-6.4 Number and Maximum Liabilities Covered Under Standard Lakhs Year No. Issued Max. No. Max. Liabilities Force Liabilities 2000-01 6858 706417. 2452 1946724 2001-02 6879 704632 2380 2047638 2002-03 - 9023 1012041 2036 2217268 2003-04 2778 1966497 21 26084 2004-05 2943 2173344 11 23639 2005-06 9962 1372432 2673 2518154 2006-07 10867 1636519 2961 2646186 2007-08 10244 1884702 4223 2944344 Total 59554 11456584 16757 (28.13) Rs. 14370037 (12.5) - 170-
Performance of ECGC ECGC has many programs or guarantee issued against risk arises due to political and commercial problems in foreign trade. It is on of the organization that directly helps to the export of India without profit motive objective. Its performance may be understand with the help of under following- Table-1 shows India s export and ECGC coverage Year Export Coverage ECGC Coverage as % of export 1995-96 106465 17542 16.4 1996-97 117525 20345 17.3 1997-98 124231 20287 16.3 1998-99 141604 22972 16.2 1999-2000 162925 23139 14.2 2000-01' 202510 24618 12.1 2001-02 207746 23890 11.4 2002-03 252790 26405 10.4 2003-04 293367 28117 9.5 2004-05 375340 35696 9.5 2005-06 454800 37421 8.2 TOTAL 2439303 380432 11.4-171 -
Table-2 shows the value of business covered sector wise Year 2001-2002 2002-03 2003-04 '2004-05 2005-06 2006-07 Guarantee short term 157274 (11.2) 237084 (16.9) 296870 (21.2) 311914 (22.2) 396865 (28.3) 1400007 export Standared 23530 26411 28117 35696 37422 151176 policies (15.5) (17.4) (18.5) (23.6) (24.7) and transfer guarantee Factoring 000 47 223 291.42 168.62 730.04 (6.4) (31.9) (0.39) (0.2) Policies 360 737 1720 1614.06 1510.14 5941.2 project (6.0) (12.4) (28.9) (0.2) (0.2) and term export Guarantee 744 699 1088 1408.47 1917.22 585669 project (12.7) (11.9) (0.0) (00) (0.3) and term export Sources Annual report of ECGC. -172-
Export-Import Bank As it has been focused that the Exim Bank is principal financial institution in India. It is one of the institution which works specially for export finance and service3s. It has evolved various lending schemes and export promotional services. There are five major components which comprises bank s promotional and operational Philosophy. They are - (A) Exim Bank make the Indian exporters internationally competitive on the count of financing terms. (B) To find Out alternative financing solutions for an Indian exporter so that they can effort internationally competitive (C) To pursue new exportunities, it provide information on export opportunities in non-traditional export. (D) To make product internationally competitive and (E) To reduce the export problems it persue the policy solutions. EXIM Bank not provide finance to the exporters but it offers a wide range of information, advisory and support services also because these are the complement of the financing programs to enable exporters to evaluate international risk. Expo9rt opportunities and competitiveness. The promotional services are done by Exim Bank like (i) It assesses economic, political, currency and credit risk and maintain - 173 -
data, (ii) Exim Bank contact regular with its customers, (iii) Regular contact of Exim Bank benefits the exporters in financial counseling, (iv) Exim Bank undertake customize research to identify markets study investment climate, determine the level of the company s competitiveness in market, (v) It identifies appropriate vehicle for entering new markets, (vi) It has structured facilities to assist individual exporters to enable them to offer alternative and competitive financial packages. Besides above promotional services it facilities the export marketing, advisory services on Multilateral agency funded projects. Project preparatory services overseas program Africa project development facilities and business advisory and technical services. Lending Programs The Exim Bank is involved at all steps of export production and provides competitive finance viz. pre-shipment, Postshipment, investment in abroad, import of capital goods export product development, export production and export marketing. For these, Exim Bank s lending program are available for three user groups- (1) Indian exporters (2) Overseas entities like overseas buyers, foreign Government, international banks and overseas financial institution and (3) Indian commercial banks. -174-
Exim Banks provides assistance to the exporters in two ways viz. funded facility and non-funded facility. Funded financial facility includes such finance which requires prompt commitment of funds, while non-funded finance does not require prompt commitment of the funds. Indian exporters were using only six funded' facilities which were operated by IDBL After some times it has added several new dimensions. The funded schemes may be catagorised according to user groups - (A) Indian exporters or Indian Company This category of facility includes the following programs - (a) Direct Financial assistance to Indian exporters. (b) Overseas Investment finance (c) Finance for EOU (export Oriented Unites) (d) Term finance for Export Production (e) Pre-shipment credit (f) Lending program for computer software. (g) Consultancy and Technology services finance. (B) Lending program for Foreign Government, cos, and financial Institutions Under this category there are three facilities - (a) overseas Buyer s credit (b) Relending facilities to overseas Bank. (c) Lines of credit to foreign Govemme3nt and institutions. (C) Lending Program for commercial Banks in India This lending program includes (a) Export Bills Rediscounting -175-
(b) Small-Scale Industries export Bills Re-discounting. (c) Re-finance Assistance. (d) Bulk Import Finance. (D) Other Funded Assistance - (a) Finance for Deemed Exporters. (b) Syndiation of export credit Risk. Now, we proceed to explain above schemes one by one - (i) Direct Financial Assistance to exporters Under this scheme, Indian exporters are eligible for finance for the period of exceeding 6 months to upto 5 years. This assistance are available for exporters to buy plants, equipment, machinery etc, (ii) Overseas Investment Finance This facility is extended to those Indian promoters of overseas joint venture and approved by Inter Ministerial Committee on joint venture according the section 372(4) of the Co. Act 1956. Amount of assistance is 80$ percent of the value of joint venture. (iii) Finance for EOU Under this, those units which are proposed to setup in EPZ or under the 100 percent export oriented schemes of Government of India, eligible for the assistance. This assistance are granted for acquisition of fixed assets. This assistance may also 100 percent extended by commercial banks for term loans. i (iv) Agency credit lines :- - 176-
This scheme was introduced in 1986 but the operation under the scheme was started in 1987. The bank provides rupee term loans on matching basis to.the assistance. (v) Pre-shipment Credit The Exim bank introduced short term Pre-shipment credit in foreign currency assistance is given to exporters to buy capital goods for export and manufacturing cycle exceeding 180 days. This was operated to finance from the year 1984. (v) Consultancy and Technology Services finance Assistance under this scheme in deferred payment basis, this is introduced in 1982 by the Exim Bank, Credit is repayable in half yearly installments over a period not exceeding five years. Normally assistance is available in Indian rupees. How ever it can also available in foreign currency. (vi) Program for computer Software exports Exim Bank offers clearance and finance under a single window under this scheme, bank is designated by the Government as an agency to provide foreign exchange for import of computers. In this connection, exporter of software is eligible 50 percent rebate in custom duty Payable on imported computer software. Exim bank got permission from Government to finance under this schemes in 1986 but the sanctions under it started in 1987. (B) Lending Program for Foreign Government companies and financial Institutions. Under this program following schemes are - (i) Overseas buyer credit - 177-
This assistance is granted to the foreign buyers to import Indian goods along with commercial banks. Normally this cr4edit is extended for contracts involving huge amount. (ii) Foreign lines of credit Under this schemes, Exim Bank provide credit to the overseas government, agencies, financial institution or buyers which import capital goods from India on deferred Payment terms. Relenting facilities to Bank overseas Banks overseas work as intermediary between foreign buyer and Exim Bank. This facility is provided to enable international banks to extended term finance to overseas importer to import eligible Indian goods and services assistance is granted generally for a period of two to five years. This scheme was announced with establishment of the bank but abandoned in 1985. (C) Lending Program for Commercial Bank in India It includes the following operations- (a) Export Bills Rediscounting Scheme Under this scheme finance is available for 90 days against short term usance Export Bills. This was introduced in March 1982. The Bills can be rediscounted with Exim Bank. The rate of interest charged by Exim Bank 12 percent per annum. An another scheme was introduced in 1985 and it is rediscounted only smallscale sector only. (b) Small-Scale Industry Export Bills Rediscounting:- - 178-
Under this program, Commercial banks avail re-discounting facility for the eligible export bills for exporter. It is belonging to only SSI sector. The limit authorized by RBI is Rs. 50 crore and period can be extended 90 days. (c) Refinance of Export Credit It is an another indirect assistance to the exporters. Export Credit is extended directly or refinance to commercial banks in India. Under this facility. Exim Bank s offers 100% refinance facility which enables a bank to extend credit differed by the exporters to the overseas buyers. Authorised dealers of Foreign exchange Bank can provide in principle clearance for differed credit contracts valued up to Rs. 2 crore and avail of refinance from the bank. (d) Bulk Import finance Exim Bank finance imports from the third world country Regarding imports into India, Exim Bank finances such imports which are export related i.e. imports by export oriented units. Under this scheme. Promissory rates drawn in favour of commercial Banks by their importer borrowers are discounted. Exim bank issues letter of commitment for finance on request from commercial banks indicating its requirements. (D) Other Funded Schemes It includes other funded schemes - (a) Export Marketing fund Under this schemes, Exim Bank is financed for export marketing activities up to cast of 50%. This assistance is a -179-
component of a export marking fond which is related with world Bank, loan to India in US dollar. (b) Finance for Deemed Exports This scheme is related to the assistance for export of capital goods and o9ther goods including selected industrial manufactures. They are eligible for medium-term finance with provision for long-term finance up to 10 years- (c) Facility for syndication of export credit Risks:- Exim banks introduced this scheme to attract participation in export credit from commercial banks which are authorizedjdealers in foreign exchange in India. The bank provides funds on export order and syndicates the credit risks to a commercial banks. Non-Funded Assistance > Finance under non-funded scheme of Exim Bank does not require immediate commitment of funds. Exporter generally require in the form of guarantee and cover schemes such as Bid- Bonds. Advance Payment of guarantee, guarantee for Retention money, guarantee for raising Borrowings over-seas and other guarantees. A brief information of these schemes is as under - This Bid Bond issued for a maximum of six months. Exporter requires at the time of presentation of the tender. In some case bank may refund 75 percent commission whenever bank feels that contract is not secured. (1) Bid Bonds:- -180-
(2) Advance Payment Guarantee Under this scheme exporters are expected to secure a moblisation advance of 10 to 20 percent of the contract value and it generally recovered on Pro-rata basis. (3) Performance Guarantee Exim Bank helps exporters and importers by issuing performance guarantee it covers 5 to 10 percent. (4) Guarantee for Release of Retention Money This enables exporters to obtain the release of contract payment prior to usance of the financial acceptance certificate. (5) Guarantee for Raising Borrowing Overseas This scheme is related to the contract value, raised in foreign currency from the foreign bank against this guarantee. It will be as up to 10 percent of the contract value. (6) Other Guarantee If exporters request for other guarantee from the Exim bank in view of custom duty or security deposite, labour guarantee are issued by the commercial banks oo). Performance of Exim Bank : Performance of Exim Bank can be understand with the help of financial position of Exim Bank. Total resourses, profit before tax, profit after tax, dividend, guarantee sanction and loan sanction. First of all be can find the financial position from the year 1996-97 to 2005-06 under this be compare paid up capital -181 -
with reserves. Actually reserve shows the importance of financial position. Table-1 shows the reserve creation on the paid up capital of the Exim Bank. During the 10 years paid up capital increased only 1.9 times while the reserves are created by huge amounts. In year 1996 reserve was 108.9 percentage of the paid up capital of 500 mn. Reserve are increasing very high rate in respect of paid up capital. Its shows that Exim Bank creates maximum reserve to fulfill uncertain loss. Thus it is beneficial for the Exim Bank. Table-2 shows the total resources of the Bank and profit earned by Exim bank before tax, here Exim bank had total resources is Rs. 102087mn while total profit on this date is rupees 25106mn. Actually this profit is gross profit and it is not increase very sharply against resources, infect seeing the performance of resources and profit the Exim Bank earns very less. Upto March 2006 table-2 shows the total resources is Rs. 102087 mn. While total profit on this date is Rs. 25106 in millon. It is only 2.4 percent of total, resources, both resources and profit before tax witnessed a raising trend upto 2005-06. Table-3 shows the profit after tax and dividend of Exim Bank. Exim bank earned profit Rs. 1973 lmn profit after tax in 10 years but dividend declare only Rs. 4642. It is 4.2 times of profit of the tax. -182-
Table shows financial position of the Exim Bank Year Paid up Reserves Reserve % of Capital paid up capital 1996-97 5000 5445 108.9 1997-98 5000 7058 141.16 1998-99 5000 8352 167.0 1999-2000 5500 9584 174.2 2000-01 5500 10664 193.8 2001-02 6500 12026 185.0 2002-03 6500 13171 202.0 2003-04 6500 14933 229.0 2004-05 8500 16625 195.5 2005-06 9500 17703 186.3 Sources Annual report of Exim Bank. -183-
Table - 2 shows the total resources and profit before tax of Exim Bank : Rs. in million Year Total resources Total profit before tax Percentage of profit as resources 1996-97 49329 1516 3.0 1997-98 15201 2017 3.9 1998-99 56665 2400 4.2 1999-2000 70264 2273 3.2 2000-01 73981 2047 2.7 <2001-02 82734 2212 2.6 2002-03 123189 2686 2.1 2003-04 155192 3042 1.9 2004-05 156922 3144 2.0 2005-06 201401 3769 1.8 Total 1020878 25106(2.4) Resources : Annual report of Exim Bank. - 184-