BANKING & INSURANCE FOR EXPORTS

1. BANKING & INSURANCE FOR EXPORTS

2. INSTITUTIONAL FRAMEWORK Ministry of Finance RBI (Act of 1934) Scheduled Commercial Bank (2nd Status of RBI Act, 1934) ECGC (Set up in 1957) Exim Bank (Exim Bank Act, 1981) FEDAI, BSCBI, IBA etc.

3. LEGAL FRAMEWORK Umbrella Acts Reserve Bank of India Act, 1934: governs the Reserve Bank functions Banking Regulation Act, 1949: governs the financial sector

4. LEGAL FRAMEWORK Export trade is regulated by DGFT and Banks may conduct export transactions in conformity with - FTP in vogue & rules of GOI/RBI and powers sub-section (3)of sec 7 & sub-section(2) of sec 47 of FEMA as notified in FEMA 23/2000-RB dated May 3, 2000

5. LEGAL FRAMEWORK Acts governing specific functions Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market Indian Coinage Act, 1906 : Governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market "Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of payment systems in India”

6. LEGAL FRAMEWORK Acts governing Banking Operations Companies Act, 1956:Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

7. LEGAL FRAMEWORK Acts governing Individual Institutions State Bank of India Act, 1954 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 National Bank for Agriculture and Rural Development Act National Housing Bank Act Deposit Insurance and Credit Guarantee Corporation Act

8. EXPORT FINANCE Pre-shipment Finance Documents required : Confirmed export order or L/C Undertaking that advance will be utilised for procuring / manufacturing / shipping of goods If sub-supplier undertaking from exporters that packing credit would not be taken unless packing credit is liquidated. Copy of IEC Code / RCMC etc., ECGC document, if any

9. EXPORT FINANCE Post Shipment Finance (provided on presenting shipping documents to the bank) The post shipment finance can be classified as : Export Bills purchased/discounted (under DP or DA basis) Export Bills negotiated (under L/C) Advance against export bills sent on collection basis. Advance against export on consignment basis Advance against undrawn balance on exports Advance against claims of Duty Drawback.

10. EXPORT FINANCE Handling of documents (i) Checklist of documents to be submitted to banks for negotiation or collection of export bills: - Shipping B/L or AWB - Insurance Policy - Invoice - Packing List - Certificate of Origin - GR/SDF Form - Bill of Exchange

11. EXPORT FINANCE (ii) Scrutiny of documents by banks and transmitting to foreign correspondent bank abroad for presentation to the drawee. (iii) On receipt of payment advice, banks credit exporters’ account with rupee equivalent to the foreign currency amount at market TT buying rates.

12. EXPORT FINANCE (iv) On payment / retirement of Export Bill, the relative GR Form has to be submitted to the RBI by the bank. (v) In case the payment is not received on due date (credit advice from the overseas correspondent branch then the liability of the exporter is converted into rupee liability known as crystallization of the bill.

13. Master Circular on Export of Goods and Services – 1.7.2010 • Salient points (i) No restriction on invoicing in Indian rupees There is no restriction on invoicing of export contracts in Indian Rupees in terms of the Rules, Regulations, Notifications and Directions framed under the Foreign Exchange Management Act 1999. Further, in terms of Para 2.40 of the Foreign Trade Policy: "All export contracts and invoices shall be denominated either in freely convertible currency or in Indian Rupees but export proceeds shall be realised in freely convertible currency. However, export proceeds against specific exports may also be realised in rupees provided it is through a freely convertible Vostro account of a non-resident bank situated in any country, other than a member of the ACU or Nepal or Bhutan".

14. Master Circular on Export of Goods and Services – 1.7.2010 (ii) Declaration for Exports Declaration as regards export of goods & services (Section 7 Regulation 3 of FEMA except in the case of Nepal and Bhutan) (iii) Exemption From Export Declaration (Reg 4) • Trade samples • Goods or S/W not exceeding US $25,000 • Gifts not exceeding Rs.5 lakhs. • Upto 2% of avr. annual exports for preceding 3 years subject to ceiling of Rs.5 lakhs for Non status holders and Rs.10 lakhs in case of status holders. - Re-export of imported items to EHTP/STP/EOUs/ SEZs etc.

15. Manner of Receipt & Payment • Bank draft, pay order, banker's or personal cheques. • Foreign currency notes/foreign currency travellers’cheques from the buyer during his visit to India. • Payments out of FCNR/NRE account maintained by the buyer • International Credit Cards of the buyer.

16. Manner of Receipt & Payment Trade transactions can also be settled in the following manner: • Indian Rupees • Routed through the ACU mechanism

17. Exchange Earner’s Foreign Currency (EEFC) Account • Account opened by resident of India in foreign currency • Credit 100% of their foreign exchange earnings in EEFC account • Non- interest bearing current account • No credit facility against security balances

18. EEFC Contd… • The eligible credit represents: • Inward remittance received through normal banking channel • Payment received in foreign exchange by a unit in Domestic Tariff Area for supplying goods to a unit in SEZ • The exporter constituents may extend trade related loan/advances to overseas importers without any ceiling • Exporters may repay packing credit advances in their EEFC account

19. Setting up offices abroad • Remittance towards initial expense upto 15% of average annual sales/income or turnover during last two financial years • Remittance towards recurring expense upto 10% of average annual sales/income or turnover during last two financial years subject to following conditions • Overseas branch has been set up • Overseas branch shall not enter into contract or agreement in contravention of the act, rules made there under • Overseas office should not create any financial liabilities for HO in India • Overseas office shall also not invest surplus funds abroad

20. Setting up offices abroad contd.. Company may be allowed to acquire immovable property outside India for business & residential purpose Overseas branch of software exporter may repatriate to India 100% of the contract value of each ‘off-site’ contract Companies taking up onsite contract should repatriate profits after completion of contract Audited yearly statement for the overseas office may be sent to AD Category-I Banks with details of expenses and repatriation

21. Advance payment against exports • Exporter receiving advance payment from buyer outside India is under obligation to ensure that: • Ship goods made within one year from date of receipt of advance payment • ROI payable does not exceed London Inter Bank Offered Rate + 100 basis points • Documents covering shipment are routed through bank • If exporter is unable to make shipment, no remittance towards refund of unutilized portion of advance would be made after expiry of one year without prior approval of RBI • Prior approval of RBI required for export agreements for shipment of Goods extending beyond one year • Banks may allow purchasing Foreign Exchange from market for refunding advance payment

22. Consignment Exports • For goods exported on consignment basis: • AD Category-I banks should instruct its overseas branch to deliver shipping documents only against trust receipt/undertaking • The consignees may deduct from sale proceeds expenses towards receipt, storage and sale of goods and remit the net proceeds to exporter • Deduction in account sales should be supported by bills/receipts in original • For consignment exports, freight and marine insurance must be arranged in India

23. Opening/ Hiring warehouse abroad • Permission for opening/hiring warehouses abroad may be given subject to following conditions: • Export outstanding does not exceed 5% of exports during previous financial year • Minimum export turnover of USD 1 lakh during last Financial year • All assignment should be routed through designated branch • Permission may be granted initially for one year and if applicant satisfies all requirements, renewal may be given • Banks should maintain records of permissions/approvals

24. Direct dispatch of documents by exporter • Banks may dispatch shipping documents to consignee directly in cases where: • Advance payment or irrevocable letter of credit has been received for full value of export shipment and sale contract provides for dispatch of documents direct to consignee or his agent in the country of final destination of goods • The exporter is a regular customer with good track record and arrangement has been made for realization of export proceeds • Documents are accompanied with declaration by exporter that they are more than Rs 25000/- in value and not declared on GR/SDF/PP/SOFTEX form • Banks may also permit “Status Holder Exporters and units in SEZ to dispatch export documents to consignee outside India with condition that: • Export proceeds are repatriated through AD banks named in GR forms • Exporter has to submit duplicate copy of GR form within 21 days from date of shipment • Banks may regularize dispatching shipping documents direct to consignee for cases upto USD 1 million or equivalent, per export shipment if: • Export proceeds have been realised in full • Exporter is regular customer of AD bank for atleast 6 months • Exporter’s account is fully compliant with RBI’s exant KYC/AML guideline • AD bank is satisfied about bonafides of transaction

25. Invoicing of Software Exports For long duration contracts exporter should bill overseas client periodically Last invoice should be raised not later than 15 days from date of completion of contract Exporter should submit combined SOFTEX form for all invoices raised for particular client, including advance remittances received in a month Contracts involving ‘one shot’ operation should be billed within 15 days from transmission date Exporter should submit declaration in Form SOFTEX in triplicate in respect of export of computer software and audio/video/TV software for valuation not later than 30 days from date of invoice

26. Short shipments • When part of a shipment covered by a GR form is short shipped, exporter must give notice to customs in prescribed manner • Incase of delay in obtaining certified short-shipment from customs, exporter should give undertaking to the AD banks that notice has been filed and will be furnished as soon as it is obtained • Shut out shipments • For entirely shut out shipment, exporter will give notice in duplicate to customs, with unused copy of GR form attached • Customs will verify the facts and certify the copy of notice as correct and forward to RBI with unused duplicate copy of GR form. Original GR form received earlier from customs will be cancelled and if shipment is subsequently made, a fresh set of GR form should be completed

27. Counter Trade Arrangement RBI will consider those counter trade proposal, which involve adjustment of value of goods imported into India against value of Goods exported from India in an arrangement voluntarily entered into between Indian Party and overseas party through an Escrow account opened in India in US dollar All imports and exports under arrangement should be at international prices in conformity with FTP and FEMA No interest will be payable on balances standing to credit of Escrow account, funds rendered surplus maybe held in short term deposit for total of 3 months in a year and bank may pay interest at applicable rate No fund based/or non-fund based facilities would be permitted against the balances in the Escrow account Application for opening Escrow account can be routed through AD category-I bank to regional office concerned of RBI

28. Export of Goods by SEZs • Units in SEZ are permitted to undertake job • work abroad and export goods from that country • subject to conditions that: • Processing/manufacturing charges are suitably loaded in export price and are borne by the ultimate buyer • Exporter has made satisfactory arrangements for realisation of full export proceeds subject to usual GR procedure

29. Project Exports & Service Exports • Project exports are export of engineering goods on deferred payment terms, execution of turnkey projects and civil construction contracts abroad are collectively called ‘Projects Exports’. • Such projects need approval of AD category-I banks/EXIM Bank/Working Group at post- award stage before execution of contracts • These contracts are governed by Memorandum of instructions on Project and Service Exports (PEM-October 2003) • To provide greater flexibility to these projects, following guidelines have been modified: • Inter-project transfer of machinery • Inter project transfer of funds • Deployment of temporary cash surpluses • Repatriation of funds in case of On -site software contracts

30. Follow up of overdue bills Ads to closely watch realisationof bills Extension requests should be reported to RBI To submit XOS statement to RBI on half yearly basis

31. Reduction in invoice value Ads can approve reduction in invoice value after the bills is negotiated or sent for collection Reduction should not exceed 25% of invoice value Exporter is not caution listed Exporter to be advised to surrender proportionate export incentives Exporters of over 3 years of export business may be permitted for write of without ceiling provided the export outstanding does not exceed 5% of the average annual realisation during the preceding 3 years

32. Self Write Off All exporters permitted write off and reduction of invoice value and extend the period of realisation beyond 180 days provided The aggregate value of such export bills written off does not exceed 10% of the export proceeds due during the calendar year and such export bills are not a subject of investigation by ED/CBI or any other agencies

33. Extension of Time Exporters to submit the application through the Authorised Dealer (Form ETX) Ads are permitted to extend the period beyond 6 months where the invoice value does not exceed $1,00,000 Such extension may be grated for a period of 3 months at a time When extension granted more than one year, the total export outstanding should not be more than 10% of the average of export realisations during the preceding 3 financial years

34. ISSUES RELATED TO EXPORT FINANCE Cost of Export Credit: India Double Digit, competing countries of the order of 6% p.a.

35. ISSUES RELATED TO EXPORT FINANCE - High Bank service charges - Insurance cover (Whole Turnover Packing Credit Premium also adding to the cost of Credit) - Collateral vs. Exposure Norms - Crystallization of Bills - Penalty on Overdue Bills

36. Rupee Appreciation

37. ECGC’s Policies • Standard Policies -Not exceeding 180 days -For turnovers less than 50 lacs in the next 12 months -Approval needs to be sought for credit limit of each buyer -Specific approval of ECGC incase of restricted cover countries [Shipment Comprehensive Risk Policy ; Small Exporter Policy ; Exporter Turnover Policy]

38. ECGC’s Policies • Specific Policies -Buyer Specific Policy -Specific Shipment Policy • Exposure Policy -Buyer Exposure Policy -Multi-Buyer Exposure Policy

39. Consignment Policy Premium rate Paise per Rs.100/- of loss limit

40. Guarantees to Banks • Packing Credit Guarantee • Export production finance guarantee • Post-Shipment export credit guarantee • Export finance guarantee • Export performance guarantee

41. Letter of Credit A credit is a letter written by the buyer’s bank to the seller advising him that he may draw a bill of exchange up to a particular amount for the shipment of certain goods and assuring him of payment on his submitting certain specified documents. (Always irrevocable Art.3 UCPDC 600)

42. Parties to the Letter of Credit • Buyer • Seller • Buyer’s Bank • Intermediary /Advising/Notifying Bank • Correspondent Bank • Confirming Bank • Nominated Bank • Negotiated Bank • Paying Bank