Exporting goods and services is a vital component of any country’s economic growth. In India, the government has been actively promoting exports through various initiatives, but one crucial aspect that often goes overlooked is export finance. Export finance is the lifeblood of international trade, providing businesses with the necessary capital to expand their markets and contribute to the country’s economic prosperity.
In this blog, we will explore the various aspects of export finance, the different types of export finance, the significance of export credit finance, current status of export financing in India, etc.
What is Export Finance?
Export finance is a means to guarantee that exporters possess sufficient funds available to meet their working capital requirements and other financial obligations in international transactions. When delivering goods to foreign countries, export finance becomes essential to ensure that the manufacturing and shipping of products can be carried out within a predetermined budget.
Types of Export Finance
When it comes to export financing, there are several key types of export finance that businesses can leverage:
1. Pre-shipment Finance
Pre-shipment finance is the financial assistance provided to exporters to meet their working capital requirements before goods are dispatched. This type of export finance aids in procuring raw materials, processing, and packing of goods for export.
2. Post-shipment Finance
Post-shipment finance is extended to exporters after the shipment of goods. It serves as a bridge between the actual shipment of goods and the realization of export proceeds. Exporters can use this type of export finance to meet their post-shipment obligations, such as paying suppliers and other expenses.
3. Export Credit Finance
Export credit finance is a fundamental component of export finance, providing protection to exporters against non-payment by overseas buyers. In India, the Export Credit Guarantee Corporation (ECGC) offers export credit insurance to safeguard exporters’ interests.
4. Export Factoring
Export factoring is another essential aspect of export finance. It involves financial institutions purchasing a company’s accounts receivable and managing the credit and collection processes.
5. Export Bill Discounting
Export bill discounting allows exporters to obtain funds by selling their export bills to banks or financial institutions at a discount. This approach offers much-needed liquidity to exporters.
6. Foreign Currency Loans
To mitigate exchange rate risks, many exporters opt for foreign currency loans as part of their export financing strategy. These loans are designed to fund export-related activities and protect against currency fluctuations.
Who Can Offer Export Finance in India?
When it comes to export financing, there are several key types of export finance that businesses can leverage:
1. Export-Import Bank of India (EXIM Bank)EXIM Bank is a specialized financial institution that focuses on supporting Indian exports. It provides export credit, lines of credit for overseas projects, and trade-related services to Indian exporters.
2. Various financial institutions, such as nationalized banks, private sector banks, foreign banks, regional rural banks, and specific cooperative banks, offer export financing services.
10 steps to get export financing
IDENTIFY FINANCIAL NEEDS
– Assess financial requirements for international transactions.
SELECT EXPORT FINANCE TYPE
Choose from various export finance options:
– Pre-shipment Finance
– Post-shipment Finance
– Export Credit Finance
– Export Factoring
– Export Bill Discounting
– Foreign Currency Loans
APPLICATION AND DOCUMENTATION
– Apply to a financial institution.
– Provide necessary documentation, e.g., invoices, purchase orders, export contracts.
APPROVAL AND DISBURSEMENT
– The lender approves the application.
– Disbursement of funds to the exporter.
UTILIZE FUNDS
– Use funds for various purposes, such as procuring raw materials, processing goods, and preparing for shipment.
EXPORT TRANSACTION EXECUTION
– Proceed with the production and shipping of goods or services to international markets.
RISK MITIGATION
– Consider export credit insurance to protect against non-payment by overseas buyers.
REPAYMENT
– Repay the export finance, including interest, after the export proceeds are received.
COMPLIANCE AND DOCUMENTATION
– Ensure compliance with international trade regulations.
– Provide necessary documentation for customs clearance and compliance.
REALIZATION OF EXPORT PROCEEDS
– Receive payment from overseas buyers after the successful export transaction.
Continue to use export finance to support ongoing international trade operations.
Indian Government Initiatives to Promote Export Finance
The Indian government has taken several initiatives to promote and support export finance in India as part of its efforts to boost the country’s exports and economic growth. These initiatives aim to create a conducive environment for businesses engaged in international trade. Here are some key Indian government initiatives to promote export finance:
Merchandise Exports from India Scheme (MEIS):
MEIS is an export promotion scheme that provides financial incentives to exporters of specified goods to offset infrastructural inefficiencies and associated costs. Under MEIS, exporters receive duty credit scrips that can be used to pay various duties and taxes, including customs duty.
Services Exports from India Scheme (SEIS):
SEIS is designed to encourage the export of services from India. It provides exporters in the services sector with duty credit scrips based on their foreign exchange earnings. These scrips can be used for various purposes, including payment of service tax, customs duties, and more.
Export Credit Guarantee Corporation (ECGC):
ECGC plays a crucial role in supporting export credit finance. It provides export credit insurance to protect exporters against the risk of non-payment by overseas buyers. This insurance coverage helps exporters gain confidence in expanding their international business.
Interest Equalization Scheme (IES):
The IES is aimed at providing interest rate equalization on pre and post-shipment export credit to make export credit more affordable for Indian exporters. It covers various export sectors and helps reduce the cost of credit for exporters.
National Export Insurance Account (NEIA):
NEIA is a scheme introduced to provide insurance coverage to Indian project exporters, enabling them to bid for and execute large projects abroad. It offers insurance to protect project exporters against non-commercial risks when executing projects overseas.
Export Promotion Councils (EPCs):
The government collaborates with Export Promotion Councils to support specific sectors. These councils work on enhancing export opportunities and provide market insights, training, and support to exporters.
Trade Facilitation Measures:
The Indian government has been working on simplifying customs procedures, reducing trade barriers, and enhancing trade facilitation measures to streamline the export process and reduce costs for exporters.
Export Development Fund (EDF):
EDF aims to support Indian exporters in their marketing efforts by providing financial assistance for export promotion activities, including participation in international trade fairs and exhibitions.
Export Finance Institutions:
Institutions like Export-Import Bank of India (EXIM Bank) play a significant role in providing export finance support, including export credit, export finance, and trade-related services.
Digital Initiatives:
The government is promoting the use of digital platforms and technology to simplify and expedite export documentation and processes, making it easier for businesses to access export finance and engage in international trade.
These initiatives collectively contribute to creating a more favorable environment for Indian exporters, helping them access export finance, expand their global presence, and contribute to the growth of the Indian economy through increased exports.
Conclusion
Export finance stands as a critical pillar in India’s journey towards achieving its ambitious goal of reaching $2 trillion in total goods and services exports by 2030.
As the nation strives to expand its presence on the international stage, the role of robust export finance practices becomes increasingly pivotal in realizing the vision of becoming a global export powerhouse.
Export finance is the lifeblood of international trade, providing businesses with the necessary capital to expand their markets and contribute to the country’s economic prosperity.
When delivering goods to foreign countries, export finance becomes essential to ensure that the manufacturing and shipping of products can be carried out within a predetermined budget.
