f* '\ •**- *;
UNITED NATIONS
ECONOMIC AND SOCIAL COUNCIL
Distr.
LIMITED
E/CK.14/WP-1/9O
30 September 1974
Original/EHGIiISH
Bccwoasac commission for africa
EXPORT CREDIT FINANCING AMD EXPORT CREDIT IHSURAHCE AHD CKJARAFTSE SCHEME IN INDIA
A«S. Navaratnarajah
Regional Adviser on Export Promotion
and
D. P. Gupta
Consultant on Export Credit Financing and Export Credit Insurance
e/ch.i4/wp.i/9o
TABLE3 OP CONTENTS
Chapter
I - INTRODUCTION 1-4
II INSTITUTIONAL SHMP' FOR EXPORT CREDIT 4-6
III EXPORT CREDIT FACILITIES AND OPERATIVE FRAMEWORK 6-14 IV EXPORT CREDIT AMD GUARANTEE CORPORATION LIMITED -
FUNCTIONS, ACTIVITIES AND OPERATIVE FRAMEWORK 14-24 V TRAINING FACILITIES FOR COMMERCIAL AND BANK
EXECUTIVES 24-25
VI SMALL-SCALE INDUSTRIES - PROMOTION OF CREDIT
THROUCHI GUARANTEE SCHEME 25 - 27
VII SUMMART 28 w 30
APOTDIXES
I Direction of India's foreign trade - Esports - Principal countries
II Composition of India's foreign trade - Exports III - IDBI Refinancing of medium-term export credits
- IDBI Suppliers Credit scheme - IDBI Buyers Credit scheme IV - ECGC Packing Credit Guarantee
- ECGC Poet-shipment Credit Guarantee - ECGC Export Production Finance Guarantee
E/Cff. 14/t/P. 1/90
TABLE OP COHMTTS (cont«d)
V Credit Guarantee scheme for small-scale industries
ANNEXES
Tables
1 Business under policies Guarantees issued
Guarantees in force at the end of the year
Risk value under policies and guarantees Source of premium incomeClaims experience analysed "by type of risks (1957-1973)
- 11 -
■,-.,.,• . CHAPTER I
■ ' " INTRODUCTION
Traditional exports . ..
1# Traditionally Indian exports nave consisted largely of either raw materials of plant or animal origiri or. manufactures from such raw materials and mineral specialities like mica and oacgane.se ore* Thus, at the commencement of the 1950s, when India embarked on a programme of economic development, its exports of such items accounted for over 95 Per cent total exports. During the first two Five—Year
Plans 1951-1956 and 1956-1961 hardly any changes in the pattern of exports were
expected though a moderate increase in the total value was expected.* This was because the new industries such as metallurgical, light and heavy engineering and chemicals, which were set up during this period, required some time to establish themselves firmly withiii the country before fHey could turn to export markets.The actual experience during the first decade of planning showed that many of India's traditional export items had received some set—back because a number of
competing countries developed export's of items like jute manufactures, teat cotton
textiles, etc* At the same time, in the industrialized countries which imported those items there was a considerable development of. substitutes, for example, paper and cotton cloth bags for jute manufactures, plastics for mica and lac and so on.
As a result, the annual average value of 1 exports.-increaaied only: marginally from'
Rs. 6,058 million during the first Five-Year Plan (!951rl956). to Rs. 6,092 laillion during the Second Five-Year Plan (1956-1961).
2» Thou^i during the second Five-Year Plan period, $fce, commodity, pattern of India1 s exports was expected to remain more or less unchanged, the acute balance—
of-payments difficulties India began to experience soon* after'the launching of this
Plan in 1956-1957 brought into sharp focus the urgency of rapid export promotion and sparred the country to step up exports. An important aspect of export promotion activity which has gathered momentum since then is the 6ontinuous and close atten tion that is being paid to the subject of export credit and export credit insurance.
Non-traditional exports
3» The efforts began to bear fruit during the third Five-Year Plan (196I-I966).
The total value of exports increased to an annual average for the third Five-Year Plan of Rs» 7624 million or by 25 per cent over the average for the second Five- Year Plane During the year ended March 1973» Indian exports recorded a good,
growth rate, the value of exports having risen by 22 per cent to Rs* 19,601 million.
Considerable geographical diversification of exports has been achieved (Appendix I.) With regard to commodity composition of exports, though the traditional items still
predominate, (Appendix II) the more significant fact is that India has been steadily
building up a modest export trade in the products of iron and steel and the
engineering industries, a sector which has shown a very high rate of growth in
India's economic development. From around 1.5 per cent of the total exports in
196Q-1961 they rose to about 8 per cent of total experts by 1972-1973-, The chief
constituents of this group are pig iron,' steel raiisi':etc«, and a wide range of
machinery and other engineering products which India is now able to export. Hius,
J9T^
a complete range of machinery required by the tea, sugar, oement, jute manufacturing, cotton textiles, shoemaking, oil, rice-and flour-milling industries can now be
exported* In transport equipment, India has now begun to export railway wagons and coaches, tracks, track equipment, commercial vehicles and automobile, parts.
Light dieael engines, small-and medium-sized electrical equipment, boilers, trans mission line towers and conductors, machine tools, office machinery and durable consumer goods such as sewing machines, bicycles, refrigerators, electric fans,
etc»t-.are some of the other important exports in this'group* AmongBt other lion-
traditional -items, exports of which have been developed in recent years are iron-ore, oilcakes and sugar* - . <■ ,- - :
4« The main markets for India's engineering products are the developing countries, chiefly in Asia and Africa, as will be seen from the following table:
Direction of India's Engineering Goods Export r
(In millions of Rupees)
SS&S3S&'- 1970/71 1971/72 - 1972/73
South East Asia *....«••.••... .259 / 330 488
f West Asia o.•••*•••»••»••*•.•• . 254 . 258 314
Africa •«••••*•*... 346 J ".'.." 341 - 265
East Europe ..*=•«•* *..! 123 131 198
Vest Europe *•«••»«••»•••»..•• 102 . 115 113
..America «9»»i>«*c««vaa«*tt«**««« . :• 51 42 92 West Indies'- t.eo4tp<>*«*»««*a*«* . 1 . 4 3
Oceanic Islands «■• .7 7 8
Australasia ««•««.••••o... 21 .32 24
Others aoo0ooe»««r»n«»9«««*«a« 2 — —
Total 1166 1260 1505
Rs. 10 million - US$ 1.25 million (approx«)
Source: Engineering Export Promotion.Council-Initial difficulties faced fry financing institutions
5» As export effortE were intensified, the range of items exported widened and new markets devaloped* This created for financing banks certain difficulties which.
were mainly of three types* In the firBt place, in many of the countries exchange
controls* or multiple .currency practices were in existence* This was considered
to be a new problem for the Indian banks as they were generally used to working .
on rules and regulations within the sterling area, countries or .by way, of reimburse
ment of export' proceeds mostly through banks in London. Secondly, because of the
Page 3
export pattern and new markets, adequate information on the credit worthiness of the importers was not readily available. Further, the importers were mainly from developing countries and conventional channels for obtaining credit informa tion were not of much value. Thirdly, with the intensification of the export drive, a number of inexperienced exporters entered the export trade. Banks, therefore, had to introduce a special mechanism to scrutinize the ability of such exporters* Tet, another problem was to evolve a suitable mechanism for
financing exports on deferred credit terms which have been assuming increasing
importance in recent years*6. Financing institutions have overcome the difficulties mentioned above and they are now in a position to serve the export sector with active support from
ECGC, in a much better manner than a few years ago. Prom the financial angle,it can be said that Indian exporters today do not suffer from any handicaps compared with their counterparts in other countries, including those in the
developed countries.Export promotion measures
!• In India, export credit financing and export oredit insurance as principal instruments of export promotion, have been recognized in all quarters. Important measures have been taken to enlarge the quantum of pre-shipment and post-shipment credits and to reduce the cost of credit. Special facilities have been instituted tq enable exporters and financing institutions to underwrite credit risks arising out of export business* Important measures taken in this regard by the Reserve Bank of India, Financing Institutions and the Export Credit Guarantee Corporation
(ECOC) are described in the following chapters*
8. Besides the export credit and insurance fields, the Government of India has * taken a number of measures to promote exports* Some of the more important measures
are: . ■ ■■ ■- ■ ' ■
(a) Simplification of procedures for importing raw materials required by the
export sector. In the case of established exporters, it is possible now to import raw materials before export orders are received;
Supply of essential and scarce raw materials at reasonable prices to
exporters.
(c) The drawback of import duty, excise duty, etc.;
(d) Cash assistance in respect of certain items of exports;
(e) Setting up of export promotion councils and commodity boards for
' various items having export potential;
(f) Setting up of export houses like the State Trading Corporation of
India, Minerals and Metal Trading Corporation, "etc. for the export drive particulary in non-traditional items, and. for developing new
markets;
(g) Publication of various materials and statistics for the benefit of
export sector.
9* It may be- emphasised here that the promotional measures initiated In India have to be viewed in the oontext that India has a large profitable domestic
market for many of the items that she exports* ' v
CHAPTER II
■INSTITUTIONAL SET-UP FOR EXPORT CREDIT <■ * General observati on
10« Commercial banks, Industrial Development Bank of India, and the Reserve Bank of India are the institutional sources of export credit in India. One significant feature in India is that all the,special schemes for financing exports have been successfully introduced within the framework of the existing ihstitutibnal'structure,
Commercial banks
11. Scheduled commercial banks are the primary source of instituional finance for exporters. A bank is scheduled if it is on the Second Schedule of the Reserve Bank of India ACT. A scheduled bank is comparable to a member bank of the Federal Reserve System in the Iftiited States. In India, Scheduled Commercial Banks, number ing 74, account for about 99$ of the deposit resources of the commercial banking system. Of these b^nks, 61 are Indian and 13 foreign. As at the end of March 1973, foreign banks accounted for 8$ of the total, deposits of the scheduled commercial banks. An important development in Indian banking was the nationalization of 14 major Indian commercial banks in July 1969.
12. According to the Foreign Exchange Regulation Act, only banks which are licensed' to deal in foreign exchange known as authorized dealers are permitted to transact foreign exchange business. There are 38 banks which are authorized dealers. As the financing of pre-shipment credit is linked with post-shipment credit, financing of foreign trade is handled by authorized dealers* Of the 38 banks, the'State Bank of India (a public sector bank set up under a special law) and its seven sub sidiaries, and 14 nationalized banks constitute the main source of institutional finance for Indian exports as will be seen from the following table/
Scheduled commercial banks1 Advances
to Exporters In millions of
Rupees
■1. State Bank of India and its subsidiaries ••••••,
2. Nationalized banks .•••..,.
^3* Other scheduled commercial
bank including foreign banks
As on last Friday of March 1972
1,265 2,062 '
941 4i268
Rupees ten million - US$ I.25 million (approx.) Source: Reserve Bank Bulletin - September 1973.
March 1973
1.425 2,739
1,079
5t243
Industrial Development Bank of India (IDBI)
13* IDBI Was set up in July: 19^4 as a fully-ownecE subsidiary of tfce Reserve Bank :0f India (RBI) as an apex term lendirig institution." The Governor of HJBI
is also the Chairman of IDBI and both RBl and IDBI KaVe a common Board of
Directors. The "authorized share capital of IDBI is Rs. "5OQ million with Rs. 400 nallion paid-up. - Recently, a Bill was ihtroducediri the Indian Parliament to give IDBI the status of a Central Bank in the 'field of term lending and if the Bill is passed the entire share capital will be transferred from RBI to the.
Government of India* r
14* The activities of IDBI may be broadly grouped under four headings:
* ,p ■ ■■
(a) Underwriting of the shares and debentures issued by industrial concerns!
and sanctioning of direct leans for the purpose of setting up and expaisiing industrial projects. IDBI statute does not contain any restrictive provisions regarding the nature and type of security that it may accept from the borrowing
concerns«
(b) Refinancing of term loans extended to industrial units by scheduled
banks and state financial corporationsB
(c) Rediscounting of bills with a maturity of over six months and up to ' "*
seven years drawn in connexion with the domestic sale of machinery and equipment,
(d) Financing of exports on deferred credit terms,
15« IDBI acts as an export bank for India and the activity is carried out" l*y the.
Export Department of the Bank, Beside's refinancing of loans granted by commercial!
banks in connexion with exports on deferred credit terms and the sanctioning of direct loans in regard to such exports, IDBI has developed* effective machinery for counselling exporters at the bid stage, drawing up of various export documents, providing status reports on buyers abroad etc. Since inception up to the en4 of June 19731 IDBI has oanctioned export finance as under:
(a) Direct export, loans
(b) Refinance of export.credits (o) Guarantees
Reserve Bank of India (RBI)
Rsi million 274
18
Rs. 803 million
16, It is the apex institution of the banking system in India and is primarily. ■ concerned with the responsibility of formulating arid implementing'the monetary policy of the country* Until 1967f measures introduced, by RBI in the field of export finance consisted mainly of measures for insulating the export sector from the impact of the credit policy* However, since 1967 RBI has taken a number of
measures to encourage banks to liberally finance exporters and also has. taken stepsto reduce the cost of export financing. Three special schemes, namely,: pre-shipment
*i«j4i'
6
credit scheme, export Bill Scheme and Export Interest Subsidiary'Scheiba, as.
introduced by RBI, have been described in Chapter III. The advances made by the Reserve Bank of India during 1972-73 to schedule commercial banks under the first two schemes amounted to Rs. 6,516* million* She facilities were used by 42 banks*' In the matter of providing refinance, RBI makes no- distinction between Indian and foreign .banks* During 1972-1973 claims for interest subsidy amounting to Rs, 53 * million received from eligible banks were settled and of this amoung, Rs. 27 million related to pre-shipment credit and Rs» 26 million post-shipment credit.
17 • In the field of export financing, the role of RBI is not to be viewed merely"
from its refinancing activity but from the over-all enthusiasm it has been able to create as the Central Bank of the country among the commercial banks, in the • matter of providing liberal credit facilities to the export sector at reduced cost.
Further,, RBI., through its specialized departments, keeps in close touch with the needs of various,-tfra&es &a& industries connected with exports* and takes suitable
measures.for. providing guidelines to banks. ....-,..*'-h
CHAPTER III
EXPORT CREDIT FACILITIES AJTD OPERATIVE FRAMEWORK " "
General Observations . ■ .
18. About 75 per cent of India's exports are on the basis of firm contracts with or without Letters of Credit* (No ready data are available about the 6xact percent age of business trasacted under Letters of Credit). Of the remaining 25 per cent, about 9 per cent of total exports are on a consignment basis, 8 per cent intra- * firm transactions and 8 per cent on deferred' credit terms* Acoor4ing to the
Foreign Exchange Regulation Rules 1952, the export proceeds of the exports described above, except the last one, i.e. on deferred credit terms, are to be realised within a period of 180 days* Any financial assiatanoe extended to a customer for a period not beyond 180 days is considered a short-term facility by the Indian banking circle.
In other words, more than 90 per cent of the credit facilities required by Indian v exporters are generally on a short-term basis. In practice, however, because of the uncertainty of shipping* the irregular supply of raw materials, longer shipment periods in the case of large contracts, etc., outstanding amounts in various
accounts may not always be liquidated within 180 days and extension of the credit period may have to be given, which is done by financing banks in all genuine oases.
19« Exporters need financial assistance generally in two stages viz pre-shipment and post-shipment. The facilities available from financial institutions in both
the stages are discussed below:Pre-Shipment - short-term - Nature of facilities
20. An exporter in India may need one or more of the following facilities at the
pre-shipment stage: . . ..
(i) A performance guarantee in favour of the importer guaranteeing the
exporter's performance under the contract. The guaranteeing bank's
H1liability is generally limited to "between 5 and 10 per cent of the , contract value;
(ii) An advance payment,guarantee in, favour of the importer against the initial payment made 'by way of advance; - - -
(iii) Letters of Credit; ..*.-'
(iv) Packing credit for the procurement! manufacture or processing of the
goods to be exported^(v) Credit against 'bills-covering incentives such as oash subsidy, duty drawbackf etc., receivable from the Government.
21. All the aforesaid facilities are provided by commercial banks only* either
singly or two/or thr.ee banks together, in the case of large transactions. A
large majority of the exporters for their domestic requirements already enjoycredit limlt(s) with banks, and it is only in minority oases that credit facilities
are requested for export deals exclusively. In the former cases, exporters are already known to their banks and as such they do not experience any .difficulty in obtaining additional credit for their export deals. In the latter cases exporters being unknown to banks, enquiries regarding their capability, status, creditworthiness, etc, are made, which takes about a fortnight. Such enquiries particularly for a newcomer in the export line are considered essential toprevent unscrupulous persons from entering into international dealings.
Pre—shipment finance scheme
22. The salient features and the operative principles of the pre-shipment finance scheme as operated upon by commercial banks in India are broadly as follows:
(a) Troes of facilities
All the facilities as described in paragraph 20 above.
(b) Coverage
Facilities are available in regard to exports from India to all exporters irrespective of their constitution. .
(c) Eligibility
Pre-shipment facilities are generally provided by banks on the strength of the Letters of Credit opened in favour of exporters in India by buyers abroad, or fiim export orders. Where it Is not possible for the exporters to lodge the- ; Letters of Credit or firm export orders initially, the lending bank extends pre- shipment advances if the exporters are in a position to produce sufficient evidence such as cables, letters, etc. In such cases banks generally -take into account the past performance of the exporters. ■
In respect of commodities like tea whioh are usually exported ,on a consignment basis, packing credits are granted on the past performance of the exporters and the declaration of export orders in hand.
Pre-shipment credit facilities are also extended' to exporters who do not have export orders or Letters of Credit in their own names provided: they are
In a position to satisfy the lending bank that they are working as sub-suppliers to the principal contractor or supplier. In such cases banks will request that1
the sub-suppliers produce (i) a bac&-to "back contract entered into with the principal supplier, and (ii) a letter from the principal supplier to the effect
that he will not seek any credit facility from his banker in respect of the portion sub-contracted.
In respect of construction contracts abroad, exporters can avail themselves of the credit facilities on the basis of a firm contract to meet working capital requirement such as the transport of technical staff and tne purchase of articles
in India. '"■
The benefits of the pre-shipment credit facilities oan be made available. . to exporters of jute goods," cashew nuts, cotton textiles, diamonds, etc., even ' '■'' if the exporters of these goods do hot have Letters or Credit of firm export
orders-; For example, in the case of diamonds, banks are allowed to extend prs-
shipment advances to-the exporters of diamonds and precious and semi—recious '.stones wltMout' insisting on Letters of Credit of firm export orders* Credits oan ri
be given to exporters in a separate account from the stage of rough precious-i
stones, e^ci imported 'by him 6r purchased locally for the purpose of cutting* r_
polisldng^etc,^,for ultimate export. : Past performance and the performance ' '-'^^"-'■
guaranteef if any, given by the' exporter are- considered sufficient for approving-6 w
ordit for the exporter. ' - : ' ' ;
In this way, the pre—shipment finance scheme is operatedMsy commei;cial
in India, in a flexible manner, under instructions and guidance from the Reserve Bank of:fndiaf w£i<iii constantly reviews'the needs of various trades and industry. *
(d) Credit Limit
Commercial banks are encouraged by the Reserve Bank of India to fix
a separate credit limit for exports without linking it with' tne" credit "limit
fixed for domestic business.
Of the facilities provided by banks at the pre-shipment stage, the packing
credit facility is tie most important one and generally requested for-in practically
all export transactions. The other facilities are simpler and need no special ' ' elaboration from the operative angle*A packing credit limit is fixed by the exporter's bank on the basis of the
amount indicated in the Letters of Credit or f.o.b./c.i.f.fas stipulated in the export order) value of the export order. In the absence-of these documentb, the limit is fixed on the past performance of the exporter, declaration of the export
order3 in hand, or such other document as may be asked for by banks. In case whereexport Contracts are not backed "by Letters of Credit or where the Letters 6f Credit*
do not cover the full invoice value of the goods to be exported, the Reserve Bank ' has clarified that subject to the creditwothiness of the exporters, banks oan
grant paoking credit advances to exporters sufficient to cover the value of the
export order j and that the granting of such an advance should be neither conditional
on a L/d being opened nor should the amount be limited to that covered by'a L/C* -;
*■ *
(e) Security
As mentioned earlier, In the majority of cases exporters are already haying separate credit limits for tbair domestic business which are prliaarily
secured by pledge dr hypothecation of movable assets, and where available by the ■/:
creation of "an equitable mortgage of immovable assets. In all these security
documents, there will generally be a clause to the effect that the security will - cow not only existing debts but also all future debts as well. In such oases, If the margin available is adequate to oover the packing credit.advances, the.
exporter will simply execute a promissory note for the purpose of using the
packing credit facility. Where" no margin is available, and the exporter s credit- ■ ;.
worthiness, according to the lending bank, is not satisfactory, he may be. asked , .■
to execute a letter of hypothecation of pledge, depending on the nature of the export*
In addition, a packing credit guarantee from ECGC is necessary^ Where a Letter of Credit is established in favour of the exporter, packing credit id allowed . In many cases against a packing credit guarantee from ECGC. No collateral other;, than the ECGC guarantee is asked for. For small exporters, ECGC has a special scheme (discussed under the ECGC Chapter) and if the lending bank is satisfied about the status and capability of the exporter, advances will be made by, obtaining
a guarantee from ECGC.
'.'■■''■■' . ■ - '' ■
In India for export credits, mortgages of immovable property is not generally ^ required by banks. It may be stressed that for extending short-term oredits to ,.;
the export sector, guarantees issued by ECGC are becoming more popular than any
other form of security. ■ ^ "■-■■■•
(f). Period of Credit '-■•,.,,*
- Packing' credit facilities are granted for a period not exceeding the tiae stipulated in the export contract or a maximum period of 180 days. 1/ The period is generally determined after taking into consideration the time required,for , ,.
procuring,,- processing or manufacturing and shipping the relative goods. Extension. : . of the period beyong 180 days can be allowed in exceptional cases only with the.
approval of the Reserve Bank of India. It is understood that a few cases only come up for extension. Most of the packing credit advances are liquidated within
the stipulated period.
(g) Rate of Interest . v -
Hot exceeding 8 per cent p.a, g/ as against 12-13 per cent charged In other short-tarm advances for domestic business. The banks are not, allowed to leyy' any other charges like commitment, management fees, etc., except those all0*6* *«aer the Rules of the Foreign Exchange Dealers Association of India (HSDA). 3*hese
charges relate to commission chargeable for issuing performance guarantees *a ... , favour of importers abroad, Letters of Credit* etc. The ra*es of suoh oorand,8si<xns
have been standardised "by FEDA* . ; ■ .
]J Since Ifay 1974, the concessional rate of interest for packing oredit
is available only for 90 days. ?.
2/ Since May 1974, the rate of interest is 9 per cent. . ;
It- • "■"(.' M. J.^-
^M^i^iii
(h) Liquidation of Packing Credits
Packing credit- accounts are generally liquidated by delivering the export^
Mils with fhe lending "banks or "by' remittances received from abroad. If the accounts remain outstanding for more than 160 days j/ without the approval of the Reserve Bank, the exporter loses the benefit of the concessional rate of interest.
- short-term .
23. -Pdsfc-shipment facilities required by an exj>orter - which is used mainjy to extinguish his pre—shipment credit depends upon the payment terms agreed upon between the exporter and importer. The type of facility that v±\l be made avail able during the postr-shipment, stage is decided when, pre—shipment facilities are granted. The following three types of payment terms cover most of the exports
from India* . . ,
(a) Letter of Credit
. . fi>) DP and Hk bill
(o) Consignment .
(a) Where Letters of Credit are available, the exporter gets paid immediately
on presentation of bill/draft and all other documents specified in the Letter of
Credit. ' . V
(b) For the negotiation of bills drawn under DP/DA terms, the main point for
consideration is the creditworthiness of the exporter and importer. If the status reports are good and the past hiBtory is also good, bills will be negotiated up to 90 per cent without any security. But if the picture is not good, the exporter may experience difficulty in obtaining discounting facilities without sufficient collateral. What .is* normally done in such cases is that banks will accept the ■
bills for collection and may advance up to 80 per cent against the security of t^e bills sent for collection; In all these cases, appropriate cover from ECGC will
be insisted upon.' '
(c) ~ Consignment - It is mainly in respect of tea that the consignment method
of sale is adopted. Tea is consigned to London for sale in auctions there.
Generally, the shipping and other documents are delivered to the agent/representa tive through his bank* The bank obtains a trust receipt before handing over the dovuments to the agent/representative to enable him to tatoe delivery of tea chests
and arrange for their sale. On sale of the tea, sale proceeds are remitted to the exporters bank. In the case of consignment sales, the consignor does not haveto wait for iihe receipt of sale proceeds from abroad, Hi,s bank will generally
accommodate him on the basis of the estimated value of the shipment and past performance. The security provided by a tea manufacturer exporter for obtainingcredit'facilities for running the tea estates generally leaves a large enough margin to take care of the post-shipment facility. In the case of merchant
exporters, subject to a satisfactory credit report, facilities are provided with appropriate cover from ECGC.Rate of feterest ■ ■
Hot exceeding 8 per cent per annum 2/.
Mftdiunv-and longHterm export credit facilities Since May 1974, 90 days.
Since May 1974t rate of interest is 9 per cent.
General observation , ....■ .,.,-,, • .
24. Exjwrts on deferred credit terms are of recent origin so far as Indj.a is concerned, and relates mainly to the exports of capital and engineering goods, and services such as textiles, sugar, cement plants, transmission line towers,
electrical and telecommunication equipment, etc* India's story of offering deferred credits for .engineering goods can, be said to have started in the beginning of
1969 after, the introduction of the Suppliers1 Credit Scheme in December 1968 by the Industrial Development Bank of India (IDBI).
No accurate, data are available regarding exports of engineering goods on deferred oredit terms. However, it is. understood that the deferred credit export pattern is arouncl 15-20 per cent of the total exports of engineering goods, which amounted to Rs. 1,505 million during the year ended March 1973*
Financial requirements
25» The financial requirements of exports on deferred credit, terms are as uader:- - A bid bond to be issued ^o the importer^ at the time of submission of the
tender. The buyer usually requires the bond, for 1 per,cent to 5 per cent
of the value of the tender. ;
- A performance bond in favour of the importer, guaranteeing the exporter's performance under the contract, the bank's liability being gnerally limited to 5 per cent to 10 per cent of the contract value.
_~ An advance payment guarantee in favour of the importer against the initial
advance payment.
- Packing credit for the manufacture or processing of the goods to be exported.
-Negotiation of shipping and other documents under Letters of Credit for
Pro rata down payments against shipments.- Post-shipment term export credit against the deferred receivables.
- Credit against bills covering incentives such as cash subsidy, duty drawback,
etc. receivable from the Government.- Guarantee facilities to raise finance in.the importing country to meet
, local expenditure in connexion with the execution of turn-key projects.
26. So far as the bid bonds and performance guarantees are concerned, these are generally issued by commercial banks. However, where the amounts involved are large, commercial banks have participated with IDBI. As regards, packing credit facilities, these are also provided by commercial banks. In the case of. some large exports, banks have entered into consortium, arrangements for providing
pre-shipment finance. . .
ii
Page 12
27. Regarding post-shipment finance, IDBI operates three schemes as follows: '
(Details given in Appendix III) ■ .
(*) Refinance Scheme .under which 100 per cent refinancing is provided to : : commercial banks at 4§- per cent interest on the condition that banks
in. turn will not oharge interest exceeding 6 per cent* Such refinanced accounts axe.not eligible-for interest subsidy frsm. Government.
(ii) Supplier's Credit Scheme was introduced in December 1968* Under this
scheme* Indian suppliers, who offer credits to foreign buyers» obtain loans from IDBI and their bankers on a participation basis* The rate of interest, charged by IDBI is so adjusted that after taking intoaccount the rate of 6 per cent charged by commercial banks1 the effective
cost to the exporter does not exceed 5i per cent* Banks' shares of
participation are eligible for the interest subsidy*. .,„;..„... .!
- (iii) Bayer's Credit Scheme was introduced only recently, i.e. on the 7th
December 1973* Under the scheme the importers will be extended credit for buying capital goods from India on terms and conditions mutually agreed upon. The Indian supplier will be responsible for execution
of the commercial part of the export contract 'whereas the financial
part will be taken care of by IDBI and participating bank(s).
28* Ml the facilities indicated above which are required by an exporter on a deferred payment basis are. available under the various schemes offered by ECGC*
Post-shipment loans are generally secured by gurantees of buyer's banks or pro missory notes executed by government buyers* In a few cases guarantees from the Governments of the buyers' countries are also available.
.Scheme of export -refinancing of the Reserve Bank of India
29* Hie Reserve Bank's"scheme of export refinancing forms part of its monetary policy instruments. Its object is to encourage commercial banks lending to the export sector even when the general stress of policy is on controlling monetary demand. In. India, banks generally experience pressures on their liquidity during what is called the busy season which lasts from approximately November to April*
Accommodation from the Reserve Bank is needed to relieve these pressures and the quantum of accommodation and the terms on- which it is made available are adjusted from time to time in the light of the over—all requirements of the economy. In
recent years, the technique of the net liquidity ratio (NLR)' has been used to
control credit* Under this technique the rate at-which a bank can borrow from theReserve Bank depends upon the ratio (NLR) of its net liquid assets, that is,
cash balances with the Reserve Bank, balances with other banks in current account"
and holdings of Government and other approved securities less its borrowings from the Reserve Bank, IDBI.and the State Bank of India to its total demand and time - liabilities. So long as the-ratio is above a certain level, the bank can borrow at the bank rate* -.Below .this figure 1 the rate is inversely proportionate to the- ; ■ NLR. Within this general framework, certain preferences are accorded in respect" : of lending to priority sectors such as the export sector. An important development in.the Reserve Bank's policy in regard to export finance is the ceiling imposed On Interest rates for export credit provided by commercial banks* Currently, the
Page 13
maximum rate of interest that can be charged by banks for both pre-shipment and ! post-shipment export credit is 8 per cent per annum as against li to 13 per cent I for domestic credit. Pre-shipment and post-shipment credits provided for exports on deferred payment terms are however subject to a lower ceiling of 6 per oent*
Since this is. below the minimum rate which banks charge for domestic credit, it has been decided to give banks a email interest subsidy from the budgetary resouroefc Therefore", the banks which provide export finance to exporters for short-term
exports are eligible for an interest subsidy of ij- per cent paid ty the Government,
through the Reserve Bank of India*
30. The undermentioned three schemes are operated by the Reserve Bank of India:
(i) Pre-shipment Credit Scheme
Under this scheme, the Reserve'Bank of India provides refinance facilities to scheduled commercial banks, provided a declaration in writing is
furnished by them that they have granted pre-shipment loans or'advances to exporters to enable them to export goods from India. The oTiartum of refinance and the rate of interest are at the discretion of the
-.■Reserve Bank. The. rate of> interest chargeable by RBI will depend on the applicant banks* NLR-, The advances under the scheme are limited.to periods not exceeding 180 l/ days both in the case of refinance to banks as well as for those granted by the latter to the exporters. However, the Reserve Bank allows the banks to extend the period,of packing credit loans granted by them for such longer periods as may be required depending
on each case-, .
(ii) Export Bills Credit Scheme^
Under the scheme the Reserve Bank provides refinance facilities to a scheduled commercial Bank authorized to deal in foreign exchangei for periods not exceeding 180 days, provided a declaration in writing is furnished by it that it holds and will, so long as any part of such loans and advances remaining unpaid, continue to hold export bills of a value not less than* the amount of such loans or advances outstanding.
Export bills having a usance not exceeding 180 days purohased/negotiated/
discounted by the borrowing bank under letters of Credit or otherwise, which are drawn'in India "and on any place In any country outside India which is a Member of the International Monetary Fund or in any aother country so notified in the Gazette of India, are eligible for being ' ' . held, hy the bank under the declaration to. be furnished by it to the
, Reserve Bank, The granting of the refinance facilities i» *t the discretion of the Reserve Bank.
1/ Since May 1974, period is limited to 90 days.
2/ Since May 1974, the soheme has been modified. Concessional rate'of
finance is available in the post shipment stage, fOr: 120 days on exports to
western hemisphere and 90 days for exports to other destirations.
Page 14 ■
The export finance schemes have teen operated ty the Reserve Bank in-a..
flexible manner and necessary modifications have been made from time to.
time to suit the requirements of particular lines of exports. Sffor-ts ,.-.
• - have also been made to remove any inhibitions which the banks may-feel - in the matter of extending export credit; In this connexion, mention ■ i- v. may be made of the relaxations made in order to remove obstacles inherent
in the export of specialised commodities such as tea, cashew nutsf . , .« . coffee, jute, machine tools, leather, diamonds and other precious stones*
(iii) Export Credit (interest Subsidy) Scheme-'
'■ *
This Scheme, which was brought into effect from March 1968, is adminis tered by the Reserve Bank of India on behalf of the Government of India as the latter's agent and the interest subsidies are disbursed under the scheme out of funds allocated by the Government periodically for the 'purpose. Under the scheme, the interest subsidy at the rate of l-2- per
cent per annum is payable on all pre-shipment (packing credit) and post- shipment credit granted by them for. exports. The packing credits as well ,as post-shipment oredits used iy. the Exporters must be adjusted in
the prescribed manner within a period not exceeding 180 1/ days in each case. In case the maximum permissible period of the advance is extended with the approval of the Reserve Bank {which is allowed only when
absolutely necessary and if circumstances are beyond the control of the exporters),. tBbe interest subsidy is also allowed for the extended period. The interest subsidy is paid on the condition that the bank does not charge the exporter on the relative advances referred to above a rate of interest in excess of 8 per cent per annum. The scheme pro-_
vides that apart from the pre-shipment and export bills oredits, the interest subsidy may be paid in respect of any other type of export credits approved by the Reserve Bank of India on -such terms and condi
tions as the Bank may stipulate.■ CHAPTER IV
SXPffiT CREDIT AND GUARANTEE CORPORATION LIMITED
Functions. Activities, and Operative Framework
Organizational structure
31. In Indiaj a government owned company, registered under the Companies Act, has been entrustedwitnil'e'xport credit insurance. The Export Credit^and Guarantee Corporation Limited, set up in 1964 as a successor to the Export Risks Insurance Corporation of 1957, is not a statutory Corporation. It has been set up as a
l/ Since May;* 1974, "the rate" of interest is 9 f and *he pre-shipment
financing is for-90 days and post-shipment financing for 120 days for export
to western hemisphere and 90 days for three oountries.Pago 15
result of an administrative decision of the Ministry of Commeroe of the Government of India, to extend export credit risk insurance and guarantee facilities to ; exporters. The authorized share oapital of this Corporation is Rs. 50 million of which Rs» 25 million is subscribed and Us, 10 million paid up.'All the shares are held ty the Government of India. The Corporation is subjeot to all the
requirements of the Companies Act. It is also liable to pays income tax like any other company.
32* The Corporation is under the administrative control of the Ministry of Commerce. It is managed by a Board of directors consisting of a Chairman, a Managing Director and a maximum of thirteen Directors. .The Managing Director is the ftall time Chief Executive of the Corporation, The Chairman and the other Directors are appointed by the Government annually and normally from among officials in Government, Banking, Insurance and the Export Trade. The Board of Directors meet at least once a month. The Corporation at present has branches in Bombay, Calcutta, Delhi, Madras and Cochin. .. . ..■',■.!.". -.- 7 Maximum Liability
33*. The Government from time to time, fixes the limits within whioh the Corporation is authorized to function. The schemes to be administered by the Corporation, the extent of cover to be underwritten, the maximum liability that the Corporation may undertake, and so on, have all been specifically approved by Government. The Corporation has to seek Government approval before introducing any new scheme.
The maximum liability for the Corporation was Hs. 7 034 million as on December 1973.
Buyer credit Limits
34* A credit limit on an overseas buyer represents the limit up to which the Corporation will accept liability, if there should be non-payment on account of commercial risks. Approval of limits on overseas buyers is an important part of
the underwriting function of the ECGC. This work is done at the headquarters, in
the Status Section where files on over 35|OOO overseas buyers are maintained,35- Oa receipt of an application for a limit on a buyer, if there is no file on
the buyer, oredit information is sought on the buyer. The major sources ofinformation are banks in India, with their network of correspondents abroad. The
services of credit information agencies such as Dunn and Bradstreet are also utilized. On the basis of the report received on the buyer a decision is taken
on the request for limit on the buyer. The limit asked for may be fully agreedto, or only up to a reduoed level, or rejected altogether. The limits approved to Indian exporters on any overseas buyer would depend'not only on the report on the buyer, but also on the Indian experience on exports to the buyer, and the
number of exporters seeking to ship goods to the buyer.Action on the above lines is also taken when requests are received for increasing the limits on a buyer already in the Corporation's records.
36. Applications for credit limits bear a charge of Rs.5/-. When an urgent report
is required, policy holders may ask for a cabled report at their cost. However,
an exporter need not pay an^ status enquiry fee for oredit limits up to Rs.0.2
million if he furnishes an original up-to-date bank report on the buyer.
37. Policy holders may make shipments to exporters Up to certain discretionary limits, if they have had satisfactory results in making shipments in the past to the same buyer on the same payment terms. The Corporation may also exercise . the discretion to approve credit limits for small values for new "buyers, even without a status Report.
STANDARD POLICIES
38. Under its policies intended to protect the exporters against overseas credit risks, SCCIC bears up to 90 per cent of the loss on account of 'commercial1 and
'political1 risks. At the request of the exporters risks on aooount of 'political' risks can be raised to 95 Per cent in large contracts for export of capital goods and like on deferred terms subject to the payment of proportionately higher premium.
Commercial Risks . . ■ ■ »
39« The 'commercial'risks covered ares
(i) the insolvency of the buyer;
(ii): the buyer's protracted default to pay (within six months of due date)
for goods acoepted by him;(iii) the buyer's failure to accept the goods, when such nonacoeptance is
not due to the exporter's actions.
Politioal Risks
40. The 'political' risks covered are:
(i) restrictions on remittances in the buyer'B country or any government
action which may block or delay payment in rupees to the exporter;
(ii) war, revolution or civil disturbances in the buyer's country;
(iii) new import licensing restrictions or cancellation of a valid import
licence in the buyer's country;
(iv) cancellation of export licence or imposition of new export licensing restrictions in India (under contracts policy);
(v) additional handling, transport or insurance charges due to the interrup
tion or diversion of a voyage which oannot be 1 recovered from the buyer;
(vi) any other cause of loss occuring outside India, not normally insured
"by commercial insurers, and beyond the control of the exporter or the t buyer.
Risks not Covered
41* - ECGC, however, does not cover risks of loss due to (i) disputes of quality,
(ii) causes inherent in the nature of goods, (iii) a buyer's failure to obtain
import or exchange authorization from the appropriate authority, (iv) default
of an exporter his agent, and (v) fluctuations in exchange rates.
'ijm*^'*' f ' •■ . r -■-■>■-.- "™*-y!,.:r*« ■ '% ? 'i"ip'V" r~ :
Page. 17
Contracts/shipments Policies
42. An exporter may either take a comprehensive risk policy covering both political and commercial risks or secure himself against political risks alone,
if he so chooses.
43. In either case, he can secure cover from the date of the contract or the date of shipment. Accordingly, he will either be issued a Contracts
(Comprehensive or Political) Risks Policy or a Shipments (Comprehensive or Politioal) Risks Policy.
Consignment Tibcports
44. Exports made on a consignment basis roay be covered under the Corporation's policies, by special endorsement. This would provide cover against politioal risks from the date of shipment, and against commercial risks from the date of sale of overseas stock /to a buyer, subject to the terms and condition's of the
policy. :
Spread of Risks
45. ECGC expects, like any other credit insurer, a fair spread of the risks it insures. Therefore, under its Shipments/Contracts policies, an exporter is
normally expected to insure the whole-turnover of his export for a period of "twelve
months other than those transactions which are covered by Letters of Creditconfirmed by a bank in India or entered into with his associates. Cover may, however, be given under these policies for speoific business done with an agreed group of
markets. Where an exporter deals in different types of goods, he may insure only allied items.
Risk of Freight Increase
46. Cover can be obtained under a contracts (Comprehensive Risks) Policy, against
risks arising from an increase of freight and insurance rates by a special endorse*- ment, for a small extra premium.
Special Policies
47. (i) Servioes Polioy - to oover both political and commercial risks in the export of invisibles.
(ii) Construction Works Policy - to cover risks of non-payment in turn-key
contracts entered into with overseas Governments (or with overseas private employers, payments of which are guaranteed by Government).
(iii) Exporter's Credit Insurance Polioy - to cover the risks of exporters
in extending credit facilities to manufacturers,(iv) Manufacturer's Credit Insurance Policy - to cover risks of manufacturers
supplying goods to exporters on credit.
(v) Scheme of Revolving Foreign Efcoohange Credits for Exporters - to enable manufacturer-exporters to obtain from abroad additional raw-materials which are essential for manufacturing goods for export.
Premium under Insurance Policies
48. Premium rates for export credit insurance are generally based on two factors
the period of exposure to risk and the country of the buyer. The first is self- evident; the second is based on the experience that the risks, particularly the political risks, are greater on exports on credit to certain countries.Some countries also have a commodity classification for the purpose of
charging a premium, 3CGC had such a classification until five years ago, but now there are uniform rates for all commodities*
Country classification
49. SCGC has a five-fold country classification, groups A to E, with the lowest premium for countries in group A and the highest for countries in group E. On average, the premium rates for exports to countries in groups B, C, D, and HI on say * DA 90 days, are higher than the premium rate for export on a DA 90 basis to a oountry in group A, by 20 per oent, IS per cent, 106 per cent and 209 per cent, respectively*
The same classification of countries is adopted by ECGC for short-term medium- term and long-term transactions*
50. The longer the period of risk the higher are the premium rates for eaclfcountry grouping. For short-term transactions, there are separate rates for DP, DA 60,
DA 90, DA 120 and DA 180* For periods exceeding six months, there are separate,
increasing rates for blocks of three months and six months. The rate of increase of the premium is not directly proportional to the period. The rate of increase is in a decreasing order, so that medium-term and long-term exports get some measure of relief.
51* The classification of countries is based on an assessment of the state of the economy of the oountry concerned and the shipment and claims experience of policy holders.
52. Besides the classification of the countries into five groups, ECGC has also placed restrictions on some countries in group E. ECGC's prior approval has to be obtained on each shipment to such restricted countries before ECGC would accept the liability for risks.
Premium rates
53* The actual rates charged by export oredit insurers, are generally treated as confidential and not published.
54« ECGC supply to each polioy holder a confidential document containing the premium table for short-term transactions under the five country groups, as well
as an alphabetical listing of countries vrith their classification (A to E).
With the help of this document, policy holders are required to work out the pre mium payable on their shipments, and to pay the premium along with their monthly declarations of shipments*
Page 19.
55» In the case of shipments involving payment for periods exceeding six months, specific policies are issued for which the premium payable is indicated at the
time of issue of the policy. . '
Declaration of shipments
56. SCGC policy holders have to furnish a monthly declaration of all shipments -made, "by the 10th of the following month. This statement covers information on the details of the goods shipped, the gross invoice value, the name of the buyer
and his country, the terms of payment, the rate of premium applicable (ascertained from the premium table supplied to the policy holder) and the amount of premium
payable. Along with his statement, the policy holder is expected to forward the cheque for the amount of premium. The Corporation will verify the statement, with particular reference to the credit limit sanctioned for the buyer and the
rate of premium applicable. ; ■ .
57 • In the oase of specific polioies for medium-term and long-term transactions*
the total premium payable for the contract is determined at the beginning and is collected in one or more instalments, without linking such premium payments to the shipment schedule. Even in such cases,.the policy holder is expected to file monthly declarations of shipments. This helps the Corporation to see if shipments are moving as provided in the contract, and whether the value of shipments is also as per the contract.
58. ECGC required the policy holders to declare each shipment, with the name of ,
"buyer. The Corporation has, therefore, the means of knowing whether the buyer to whom a' shipment is made has been allowed a credit limit and if the shipment
is within such limit. :
Processing of claims
59- A claim arises when one of the risks insured against, materialises. Credit insurers normally do not cover the risk of a buyer not accepting or paying for the goods because of differences over the fulfilment of the terms of the contract.
In the oase of non-acceptance of goods, ECGC expect action to be taken to safeguard best the interest of the exporter, the Corporation and the countiy. The exporter is usually advised to sell the goods to some other buyer. If this were not
possible, or if a worthwhile price is not secured, the exporter is advised to
bring back the goods to India and he is paid 90 per cent of the reshipment expenses.
Non-acceptance of goods contracted for often happens when the market has declined subsequent to the contract. This is not a credit risk, and normally the terms of oontract should be observed. The Corporation would, therefore, generally expect the exporter to proceed legally against the buyer unless the Corporation consider that recourse to law would reserve no useful purpose.
60. A claim arises only when there is a clear debt payable by the buyer which is
not paid. If the buyer refuses payment on the grounds that the terms of thecontract (in regard tof say, quality, specifications, delivery schedule) have
not been fulfilled, or on the grounds that some money is. due from the exporter for some reason or another, the dispute has to be properly settled, in a court of law, before the Corporation will pay the claim. However, ECGC may settle aclaim without resort to legal action if it is satisfied that such action would
serve no; useful purpose. In such a case, (the insured exporter has to "bear a first loss of 20 per cent of the invoice value and SCGC will "bear 80 per cent of the balance of the loss, subject to a maximum of 36 p'er cent of the gross
invoice value.
61. In case of insolvency of the buyer, ECGC, will pay the claim one month after
the exporter's loss is admitted to rank against the insolvent's estate or six
months from the due date, whichever is earlier. In the case of the buyer's protrac*
ted default, the claim is settled six months from the due date. Claims on account
of additional transport and other charges on account of voyage diversions are paid.as soon as proof of loss is furnished. In all other cases, a claim is settled four months after the event causing the loss*
62. Scrutiny of claims is with reference to the conditions in the policy. For
example, the regular filing of monthly declarations on time, disclosure of all facts affecting the risks insured at the time of proposal as well as subsequently, and* using reasonable care and forethought to avoid or minimize losses, are some of the conditions whioh the polioy holder has to fulfill and failure to do somay absolve the Corporation of its liability under the policy. However, the
Corporation may, and does, ignore lapses.which are only technical and which do not
affect the interests of the Corporation.
Assignment to Banks
63. ECGC allows three 'kinds of authorizations to be registered. All claims
likely to arise under a Whole-turnover policy may be registered in favour of a bank under a Whole-turnover authorization, An ordinary authorization may be . registered in respect of a specific shipment. Such authorizations ensure payment of a claim to the bank instead of to the polioy holder, only to the extent that the claim is payable in terms of the polioy. A special authorization registered in favour of a bank in respect of a shipment, on deposit of a sum of money, will enable payment to be made to the bank if the claim is vitiated by the exporter not including some other shipment made t»y him in the monthly declaration but other wise'in order. The bank^has ho right to receive payment under an authorization if the claim is not tenable for any fault of the exporter. '".,..
The bank can safeguard its: interests better at the post-shipment stage, "by seeking a post-shipment guarantee from the Corporation.
Even in a case of assignment to a bank, it is the exporter who has to pursue
the claim. * ' _
Bank Guarantees . ,
64. 3CGC offer six types of guarantees tp banks, which cover, mainly the risk of
non-payment of advances made tjy banks to exporters.
6% Packing Credit Guarantee covers an advance made by a bank to an exporter (or
a manufacturer exporting through an export house) for the manufacture, processing,
purchasing or packing of goods for export against a firm order. Sxtent of coverPage 21 ,
is 66 2/3 per oent (raised from 50 per cent in 1964). Specific guarantees are issued for each exporter to whom a bank makes such advances, covering over a period,' say one year. A higher cover Of 90 per cent is allowed,in the case of advances to a small merchant-exporter. If a bank agrees to cover all its packing credit advances (except advances which the Corporation may agree to exclude) under a Whole-turnover Guarantee, the extent of cover is 75 per cent and the premium is
also loweer.
66. A Post-shipment Guarantee is issued to cover advances made by a bank, to a policy holder, through the discounting of export bills. The Export Finance Qua*
rantee covers advances by a bank up to a maximum of 50 per cent of export value, towards receivables in the form of cash assistance and duty drawback. The • -Export Production Finance Guarantee, which oombines the features of the Packing Credit Guarantee and the Export Finance Guatantee, covers an advance by a bank at the pre- shipment stage, to 150 per cent of the export value, towards the value of the goods to be exported and the receivables. In all these guarantees, cover is up to 66 2/3
per cent of loss
67. While the above concerned finanoial guarantees covering advances by banks, the Sxport Performance Guarantee issued to a bank in some specific situations (e.g., bid bond in a tender, performance in a contract, bond against an advance import licence, etc) is primarily a guarantee of the exporter's ability to manufac ture and effect deliveries aooording to the terms of a contract. Lose up to
66 2/3 per cent due to insolvency or protracted default of the e,xporter is covered
by ECGC* ,
68. Transfer Guarantee was introduced by 3CGC in 1972 to protect banks from losses
that might arise in confirming Letters of Credit opened by banks abroad in favourof Indian exporters. The guarantee covers 75 per cent of the loss if it is on account of insolvency of default of the opening banks and 90 per cent of the lose if it is due to any political risks Preventing transfer of funds from abroad,to
India.69. Out of the six iypes of Guarantees issued by ECGC, four have proved to be very
popular and these are Packing Credit, Post-shipment, Export Production Financeand Sxport Performance Guarantees. The last one needs no detail elaboration.
Details of the other three types of guarantees are given in Appendix IV. It may
be emphasized that guarantees issued "by JiJCGC in favour of banks have to a large extent, solved exporters' problem of furnishing collaterals for the purpose 6f
availing of bank facilities both at the pre - and post-shipment stages.t
Assessment of Credit Risks
70. For processing a proposal for the purpose of issuing an individual: packing
oredit guarantee, SCGC scrutinizes the proposal mainly^ for the purpose of assessing
the credit risk. Some of the more important aspects, which are looked into by ECGC for examination of a proposal, are broadly as under:Page 22
(a) Credit analysis:
(i) Export turnover of the exporter during past two years and his reputation
.> and oompe-tence in the business, ,
(ii)
Constitution of the exporter's firm. Experience shows that degree of risks varies according to the constitution of the firm and element of risks inherent in the constitution of different types of firms plays .part. The following is the brief outline of the degree of risk:Degree of Risks Partnership firms
Proprietoryship Limited Companies
Element of Risks
- dispute among partners resulting . in dissolution of the firm .
- lack of experience of the Proprietor - diversion of funds to associate concerns.
£■'
<VO
Maturity Period of credit - Degree of risks varies according to the nature of commodities financed* Maturity period has, therefore, to be fixed after taking this important aspect into account without creating undue hardship for the exporter. Experience shows that ,degree of risk is high in commodities like oil calces, sea foods, leather goods and handicrafts. Again a merchant exporter intending to export cotton textiles desires Packing Credit advances for six months for purchasing • cotton textiles from the mills. In this case the credit period requested for, seems to be unduly long as in India supplies could be obtainedfrom the mills against payment in a muoh shorter period. This point will, therefore, need discussion with the applicant bank.
(b) Credit .judgements
(i) ability and integrity of the borrower;
(ii) securities, if any, obtained by the bank for maintaining recourse
should bank's judgement fail.
(c) End-use ■ .
Here ECGC would like to know the mechanism of the lending bank in
controlling the end-use of the packing credit advances. For example, in the case of a merchant exporter, whether advances are being made to him or directly to the supplier of the goods. It would be preferable to make direct payment to the suppliers instead of the borrower.who is a merchant exporter. In the oase of manufacturer exporter, whether separate accounts are being ^maintained to keep track of the funds made available for the manufacture of the goods to
be exported. .
Page 23
(d) Follow^Up
ECGC would like.to.know the inspection machinery of the lending "bank and how they vsrif^ stocks periodically in cases, where letters of hypothecation have boon executed, i3CGC also wants to know whether the lending bank keeps in close touch with the manufacturing activities of the borrower
71. As mentioned earlier? scrutiny of a proposal will "Be carried out only in oases of individual Packing credit guarantee proposals and that too, if the bank., asking for such guarantees is not so known to ECGC. In practice, most of the bank's operations are now known to ECGC and as suchs detailed examination of proposals is no longer considered so necessary.
72. In the case of Whole-turnover packing credit guaranteesr detailed assessment, is not necessary as the bank gives ECGC a broad spread of risks by offering all their packing credit advances*
ECGC's Business
73. Six tables are given in Annax covering thy ECGC's business, premium income and claim exjr.rj.once.
74. The following points are of interest to appreciate how ECGC has helped the export sector;
Policies
(a) Specific policies (tableINo.l) mainly represent insurance cover provided
for high value contracts for exports of plant and machinery generally involving medium and long-term credits* In 1972 the business under this item recorded amaximum liability of Rs«f>12 million, oompared with 348 million in 1973 and 242
million in 1971« Some of the large contracts underwritten by ECGC relate to exports of complete textile complex and transmission line towers to Libya, boilers to
Malaysia, cement plan to Iraq, copper conductors to Irans etc* But for ECGC's active support, Indian exporters would not have- perhaps entered into negotiation for such high value contracts.
(b) The insurance policies issued to exporters by ECGC serve .as collaterals to banks which extend post-shipment finance to exporters. The policy benefits authorized in favour of financing banks..by policy holders J;otallled Rs.1,303 : million ir. 1973 as against Rs.9^0 million in 1972 and Rs.54O million in 1971*
Guarantees
(a) The value of bank advances covered under various financial guarantees (table No. 2) in 1972 amounted io Rs.5»O64 million ,and of this amount Rs.4»458 million or 88 per cent represented the advances under Packing'Credit Guarantees.
This only reveals the popularity of the Packing Credit Guarantees among the banks
India. The tctal liability under guarantees in 1973 was Rs.3,396 million as a$ains*t
1?98°* million in 1972. The value of advances by banks under these guarantees is
not availabley but should be almost an increase of 25'$ over the 1972 figure.
r
H
(b) The number of Packing Credit Guarantees in force at the end o.i 1972 ' (table No* 3) recorded a marginal increase to 1,022 from 968 in 1971. This is
mainly due to a larger number of individual guarantees being replaced Tap one
Whole-turnover guarantee issued to a bank. It is gathered that 10 banks and 4 ' subsidiaries of the State Bank of India have already taken' Whole-turnover Packing Credit Guarantees. Because of oertain attractions in the scheme about which
mention has been made earlier, it is possible that more banks will join tap
scheme before long. However the 1973 figure for pacuing guarantees was 1545. The reasons for this increase in number are not immediaiily available.
CHAPTER V ■-■-■'
TRAINING FACILITIES FOR COMMERCIAL AND BANK EXECUTIVES
. t
75» Side by side with the introduction of export promotional measures, the
authorities laid stress on training of executives oonnected with the export develoj>- raent. As a result, a number of training establishments have been set up in India.
The following are some of the establishments directly involved in organizing training programmes relating to export marketing documentation and financing.
(a) Indian Institute of Foreign Trade
The Institute is under the administrative control of the Ministry of Commerce, * Government of India. It conducts various trairing courses, ranging from one week to ten months, with emphasis on export marketing and documentation. The Institute has also designed special training programmes to meet the requirements of commeroial.;
banks. The participants are mainly from industry and trade and offioials and
non-officials from developing countries of Asia, Africa and Latin Amerioa.The Institute has to its credit a number of publications and research papers*
Its quarterly journal - Foreign Trade Review - is extremely popular in trade
circles.(b) Bankers Training College. Bombay
This college is run by the Reserve Bank of India and is mainly intended for
bank executives, both at junior and senior level. The college runs a number of
courses covering all aspects of banking from a praotioal angle and such courses are attended by the officers from large and small banks. The members of thefaculty are drawn from the Reserve Bank as well as commercial banks. The oollege conducts specially designed courses for the export department of commercial banks.
In addition, the college also conducts training programmes in foreign exchange
covering all the aspectsoof foreign exchange transactions in commercial banks. . "Bank offioials of developing countries of Asia and Afrioa participate in the
training programme. Recently, the oollege organized a training programme on develop ment finance on behalf of the World Bank and trainees from various countries attended
the course. • •
