Your customer ABC Ltd., has been awarded a contract of US $ 2 million for the supply of engineering goods to an importer in Argentina on deferred payment terms spreading over a period of seven years.
(a) What do you understand by deferred payment?
(b) What are the facilities available to an exporter in India for financing deferred payment exports?
(c) How can the customer guard against the risk of exchange fluctuations?
What do you understand by ‘Turnkey Project’?
Deferred Payment Exports:
Normally export proceeds are expected to be realised within a period of six months from the date of shipment. An export contract providing for payment extending beyond this period is known as deferred payment contract. Payment may be made by the importer over a period in instalments. All deferred payment contracts require prior approval of the Reserve Bank. Exports on deferred payment terms are allowed in respect of selected engineering goods.
Projects, which involve the rendering of services like design, civil construction, erection and commissioning of plant or supervision thereof, along with the supply of equipment, are known as turnkey projects. All requirements of the projects like issuing of guarantees by bank on behalf of exports, opening of site offices, opening and operating of foreign currency accounts abroad, bridging finance by way of remittance from India on repatriation basis or overdraft arrangements with overseas banks, third party imports and payment of commission to agents are governed by exchange control regulations. All proposals for turnkey projects, whether on deferred payment terms or not, require prior clearance from the Reserve Bank.
Apart from the preshipment and post-shipment financial requirements, exporters on deferred payment terms and those undertaking turnkey projects may require various guarantees. The requirements are met by banks and by the Exim Bank in participation with banks.
Commercial banks grant both pre-shipment and post-shipment finance at concessional rates of interest to exporters. They may also execute guarantees on account of bid bond/performance/advance payment/release of retention money after seeking approval of the Exim Bank where necessary. In case of large contracts Exim Bank may also participate with the banks in issuing guarantees.
Exim Bank helps export through refinancing the commercial banks’ advances to exporters. In selected cases it also makes direct finance under its scheme for direct finance assistance to export and buyer’s credit scheme. ECGC offers various policies to cover different risks involved in exports on deferred payment terms and on turnkey basis which cover risk up to 90%. These policies by covering the major risks enable the banks to issue guarantees.
Working Group :
Various aspects of export contracts under deferred payment arrangements and turnkey projects require approval of several institutions in India such as Reserve Bank, Exim Bank, ECGC and the financing bank. With a view to obtaining the necessity for exporters to approach different agencies for obtaining approvals and avoiding delays, a working group comprising representatives of Exim Bank, Reserve Bank, ECGC and the bankers of the exporter with Exim Bank as the focal point is functioning to grant package clearance to proposals submitted by exporters. In case of contracts of high value representatives of Finance and Commerce Ministries of Government of India will also ordinarily participate in the meetings of the working group.
For contracts of value not exceeding Rs. 5 crores authorised dealers are granted power to give clearance in principle on behalf of Reserve Bank, Exim bank and ECGC, provided the conditions stipulated in this behalf are satisfied. For contracts up to Rs. 30 crores Exim Bank can give clearance in principle.
The exporter can cover himself against exchange rate fluctuations by taking an Exchange Risk Contract Policy of ECGC. This policy covers exchange risk, with reference to the date of contract for periods from 12 months to 15 years. The cover is available for contracts expressed in US dollars, pound-sterling, Japanese yen, Deutsche marks, French franc, Swiss franc, Australian dollars and UAE dinar.