Government of India has been extending lines of credit to the Governments of friendly developing foreign countries for a number of years. These lines of credit are meant for only the Governments of foreign countries and not the private organizations of a particular country, from the Govt. of India. The main objective behind the extension of these lines of credit is two fold; firstly, to promote the export of major goods of Indian manufacture to these countries, and secondly, to achieve the political objective i.e. goodwill of beneficiary countries.
Criteria for GOI (Govt. of India) Credits
The recipient country must have a satisfactory credit standing and be able to meet its repayment obligation in hard currency.
Soundness of Project
The applicant for credit must submit contracts with information to establish the technical and economic soundness of the Project. This is necessary to establish its capacity to generate Projects, particularly for repayment of credits.
The financing that India provides is intended to be used only for goods and services to be exported from India and should not be used for local costs in the borrowing countries, nor for third country import.
Prospects for Continuing Trade
The greater the export promotion, the more attractive it is for long term finance. There should be a strong preference for transactions offering continuing trade possibilities on commercial credit terms not requiring continuous commitments of GOI.
New Credit Policy
GOI credits form a small proportion of medium term credit and are motivated largely by political considerations. The credit policy was reviewed in 1994-95 and the following decisions were taken with a view to increasing optimization of the credits:
• Besides capital goods, product coverage was expanded to cover consumer durable, including passenger vehicles and consultancy. There is no fixed ceiling or ratio for these items in relation to the total credit. Eligibility of consultancy for credits was considered with a view to generating Projects and machinery exports from India. Consumer durable provides an opportunity to introduce branded Indian products including white goods and passenger vehicles to potential markets.
• GOI credits are normally confined to low risk countries.
• GOI credits, as a general rule, are denominated in US dollars and carry a uniform rate of interest equivalent to six months LIBOR prevailing on the date of signing of credit agreement.
• All credits normally cover 90% FOB value of the goods and services. The 10% FOB value of goods and services is to be paid by the importers in freely convertible foreign currency at the time of opening of the letters of credit.
• All credits normally have a uniform repayment schedule of 12 years inclusive of 3 years moratorium. However, for consumer durable and consultancy the repayment period is 3 years inclusive of 1 year moratorium.
• An identification of priority sectors for contracting under the credits to be jointly carried out in the light of India’s bilateral/global export strategy, promotion of joint ventures, resource base of recipient country and enhancement of its export capabilities.
There have been a few departures from the above mentioned standard terms and conditions. For example, the credit to Vietnam has been extended in Indian Rupee denomination instead of US dollar and on 100% FOB basis instead of 90% FOB basis. Similarly, in case of credit to Laos, the interest rate is 3% per annum instead of fixed LIBOR six months.
Procedure for Disbursement of the Credit
After the signing of the Credit Agreement, Indian exporter enters into a contract with the importer of the recipient country for export of goods and services from India. These contracts are generally finalized through normal tendering process. GOI does not associate itself in the finalization of contracts. Signed contracts are first approved by the Government of the recipient country and then forwarded to the Department of Economic Affairs (DEA) for GOI approval. In DEA each contract is examined for its conformity to the terms and conditions of the credit agreement, price reasonableness, third country import content etc. After each contract has been approved intimation thereof is sent to the recipient country and the State Bank of India, Overseas Branch, New Delhi by this Department. The State Bank of India, Overseas Branch, New Delhi acts as the implementing agency for the GOI.
The procedure for disbursements in respect of contracts to be financed under the credit is as follows:
• The State Bank of India, New Delhi concludes a separate banking arrangement with the bank nominated by the recipient country.
• The State Bank of India, New Delhi maintains account and makes disbursements there from to the exporters in India either directly or through negotiating banks.
• The disbursements from the aforesaid account are made in respect of contracts concluded under the credit agreement. Such contracts should have been entered into after coming into force of the Agreement and should be in respect of items agreed to be financed under the credit.
• All disbursements under the credit are made under Letters of Credit opened by Banks in the recipient country.
• All Letters of Credit should be advised by banks in the recipient country to the State Bank of India, New Delhi for onward transmission to the exporters either direct or through another bank in India, if any, nominated by the exporters. Normal commercial practices followed in respect of advising payments under Letters of Credit is adopted to ensure that the remaining 10% of the amount of the Letter of Credit is received in US Dollars. All claims to the State Bank of India for payment of 90% of the FOB value need to be supported by a certificate of the negotiating bank that the 10% FOB value directly payable has been received.
• The State Bank of India checks the Letters of Credit and contracts as to their eligibility for financing under the credit and if in order forwards the credit with an operative advice either direct to the exporters or to their bankers. A copy of the advice is also endorsed to the Bank of the recipient country.
• The State Bank of India also charges a disbursement charge of 1/10th of 1% when reimbursing claims under the Letters of Credit. This charge together with other charges, such as advising commissions on credits, negotiating charge, out of pocket expenses incurred by the State Bank of India or bank concerned in India, is debited to the aforesaid credit account.
• While claiming reimbursements, the negotiating banks shall certify that the terms of the Letters of Credit under which payments have been made have been complied with; they shall also submit copies of invoices and non-negotiable copies of bills of lading in support of their claims.
General Guidelines on Exim Lines of Credit
Exim Bank extends Lines of Credit (LOCs) to overseas financial institutions, regional development banks, sovereign governments and other entities overseas, to enable buyers in those countries, to import goods and services from India on deferred credit terms. The Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. LOC is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters, especially to SMEs, and serves as an effective market entry tool.
How does it work?
- Exim Bank signs LOC Agreement with overseas Borrower Institutions (Borrower) and announces the availability of LOC for utilization, when the Agreement becomes effective.
- Exporter checks with Exim Bank, available amount under the LOC and quantum of service fee payable to Exim Bank and negotiates contract with Importer.
- Importer approaches the Borrower for approval of the contract.
- Borrower appraises the proposal. If satisfied, approves the contract and refers to Exim Bank for concurrence for inclusion of contract for being financed under the LOC.
- Exim Bank accords approval to the contract, if in conformity with the terms of LOC. Exim Bank conveys contract approval to the exporter and the Borrower.
- The Importer arranges remittance of advance payment to the Exporter and also opening of a Letter of Credit, which states that the contract is covered under Exim Bank's LOC to the Borrower and reimbursement will be by Exim Bank for the Eligible Value of Credit.
- Exporter executes the contract/ships the goods/provides services.
- Commercial bank in India, designated as the Negotiating Bank, negotiates shipping documents and pays the exporter.
- Exim Bank reimburses the Negotiating Bank, on receipt of valid claim and service fee, by debit to the LOC account of the Borrower.
- Borrower repays Exim Bank on due dates.
EXIM Bank:LINES OF CREDIT
1. Exim Bank signs agreement with Borrower and announces when effective.
2. Exporter checks procedures and Service fee with Exim Bank and negotiates contract with Importer.
3. Importer consults borrower and signs contract with exporter.
4. Borrower approves contract.
5. Exim Bank approves contract and advises borrower and also exporter and commercial bank.
6. Exporter ships goods.
7. Commercial bank negotiates shipping documents and pays exporter.
8. EXIM Bank reimburses Commercial bank on receipt of claim by debit to borrower.
9. Borrower repays EXIM Bank on due date.
Confirmation of Letters of Credit (L/C) by Exim Bank under the Trade facilitation programme of the European Bank for Reconstruction and Development (EBRD)
The programme envisages confirmation of Letters of Credit (L/Cs) received by Indian exporters from pre-approved banks in the countries of EBRD’s operations, i.e. the countries of Central and Eastern Europe and the Commonwealth of Independent States (CIS). EBRD will provide guarantee facility to Exim Bank to cover such L/C confirmation.
Features of the Programme
• The programme covers the 27 countries of EBRD’s operations listed below and Exim Bank will confirm
L/Cs for supporting Indian exports to these countries :
Albania Georgia Romania
Armenia Czech Republic Russian Federation
Azerbaijan Hungary Slovak Republic
Bosnia & Herzegovina Kazakhstan Slovenia
Belarus Kyrgyzstan Tajikistan
Bulgaria Latvia Turkmenistan
Croatia Lithuania Ukraine
Estonia, Moldova Uzbekistan
FYRMacedonia Poland Yugoslavia
(The list of countries is subject to change)
• Exim Bank’s L/C confirmation will cover the risk of non-payment by the Issuing Bank.
• Eligibility Criteria : The L/C Issuing Bank must be in EBRD’s list of pre-approved banks. (List of pre-approved banks can be obtained from Exim Bank’s Trade Finance Group). Eligible Goods means export of all types of goods and commodities and related cost of transport and other services to any one of EBRD’s countries of operations and not included in EBRD’s exclusion list (items in the exclusion list can be obtained from Exim Bank’s Trade Finance Group).
• Pricing : The fee payable to Exim Bank for adding confirmation to the L/C will be advised by Exim Bank along with the approval for L/C confirmation. The fee will be payable before confirmation of L/C.
How it works
• Under the programme, an importer of Indian goods in any of the above countries will approach a bank for opening an L/C. The L/C issuing bank should be on EBRD’s list of pre-approved banks. Either the L/C issuing bank or Indian exporter may request confirmation of the L/C from Exim Bank. For this purpose, application forms are available with Exim Bank. Exporters are welcome to discuss the transaction before sending a formal request for L/C confirmation to Exim Bank.
• Exim Bank will convey approval for confirmation of the L/C and the fee payable by the Indian exporter/L/C issuing bank. L/C will be governed by UCPDC-500.
• L/C issuing bank shall not, without Exim Bank’s prior written consent, amend the terms of the L/C.
• Indian exporter will ship the goods covered under the contract and shall present the documents for negotiation to his bank. The negotiating/paying bank will ensure that the documents are as per the terms of the L/C and shall make payment under the L/C to the Indian exporter. The negotiating/paying bank will forward the documents to the L/C issuing bank. Negotiating/paying bank shall keep Exim Bank informed on each disbursement made to the Indian exporter under the L/C and each claim for payment made to the L/C issuing bank and amount received by the negotiating/paying bank from the L/C issuing bank in settlement therefor, till retirement of the L/C.
• In the event the L/C issuing bank fails to reimburse the negotiating/paying bank, Exim Bank will pay the negotiating/paying bank as per the terms of approval for L/C confirmation.