The ways in which banks in India provide short-term export finance and the types of assistance available to banks from the Government of India, Reserve Bank and Export Credit and Guarantee Corporation in providing such finance are discussed below.
All the financial requirements of an exporter, from the time he enters into a sale contract and starts working on it and till he receives final payment from the importer, are met by commercial banks. The facilities available from banks are generally classified into two broad heads—(i) pre-shipment finance, and (ii) post-shipment finance.
1. Pre-shipment finance or packing credit is the advance granted to the exporter to procure, process, manufacture, pack and prepare the goods for export. In other words, it is the facility extended to the exporter before and till the goods are shipped for export.
2. Post-shipment finance refers to the credit facilities extended to the exporter from the time goods are shipped and till the export proceeds are realized. Post-shipment finance may take any of the following forms: (a) Purchase of the bill drawn on the importer; (b) Negotiation of the bill drawn on the importer, where it is drawn under a letter of credit; and (c) Advance against export incentives like Duty Drawback.
Reserve Bank’s help to banks in providing export finance takes the form of providing refinance facilities and providing interest subsidy. The Reserve Bank provides refinance under the following schemes: (a) Pre-shipment Credit Scheme (for pre-shipment advances); (b) Export Bills Credit Scheme (for post-shipment advances); and (c) Duty Drawback Scheme (for advance against Duty Drawback entitlement).
The Export Credit and Guarantee Corporation provides cover to the exporters for risks arising out of the failure of the importer or any action by the Government in the importer’s country, in the form of various policies it issues.
For the banks it issues financial guarantors which protect the bank against insolvency or protracted default of the exporters.
The Government helps commercial banks mainly through formulation of policies, especially with regard to the availability of incentives. Government assistance reaches to banks through the Reserve Bank and Export-import Bank of India.