1.1 Introduction of the EXIM bank
Export-Import (EXIM) Bank of India is the premier export finance institution of the country. It commenced operations in 1982 under the Export-Import Bank of India Act 1981. The aims of the company is to provide the financial assistance to exporters and importers and to coordinate the working of institutions engaged in financing export and import of goods and services with a view to promote the country’s international trade. The Exim Bank of India has been both a catalyst and a key player in the promotion of international trade and investment. The head office of Exim bank is located in Mumbai, India. In addition to that, it has nine other regional offices in the major cities of India and eight offices overseas in Singapore, London, Washington D.C, Dubai, Durban, Dakar, and Addis Ababa.
The Exim Bank of India is fully owned by the government of India. It is managed by a Board of Directors which include the representatives from the government, Export Credit Guarantee Corporation of India, Reserve Bank of India, public sector banks, and the business community.
The Exim Bank of India provides various types of financial services in India and internationally. The company provides financing for export-oriented companies, including loan programs for project finance, research and development finance, expansion finance, equipment finance, and working capital and overseas investment finance as well as buyer’s credit facilities for the export of Indian goods and services. Apart from that, the company offers a line of credit to overseas financial institutions, sovereign government, regional development banks, and other overseas entities in order to encourage them to import the developmental and infrastructure projects from India. The Exim bank also finances the export projects such as civil engineering and construction, building material, procurement, technical and consultancy, and turnkey projects. Furthermore, the marketing advisory services, export advisory services, and the research and analysis services are provided by the Exim Bank of India. It not only serves the exporters and importers but also the small and medium enterprises (SMEs), trade and industry associations and external credit agencies.
1.2 The types and range of financing facilities offered in the medium and long-term
1.2.1 Lines of Credit
The Exim Bank of India extends the Line of Credit (LOCs) to the overseas financial institutions, foreign government, regional development bank and other entities overseas since 2003. The line of credit allows the buyer in those countries to import the developmental and infrastructural projects, equipment, goods and services from India on deferred credit terms. It is undeniably true that line of credit is a financing mechanism which provides a safe mode of non-recourse financing option to Indian exporters particularly SMEs. In other words, the Indian exporters can get the full payment in shipment of goods through Exim Bank without being exposed to risk on the buyer or the buyer’s country. The Exim Bank extends line of credit on its own and at the behest and with the support of the Government of India.
Government of Indian supported the line of credit (LOCs)
In 2003, the Indian Development and Economic Assistance Scheme (IDEAS) was established by the government of India for the purpose of sharing India’s development experience through trade, infrastructure development, capacity building and skills transfer to the developing countries in Asia and Africa. The Exim bank offer the concessional line of credit to the developing countries and enable those recipient countries to gain the benefits of socio-economic. The standard procedures of LOCs are as follows:
project identification and preparation,
review and approval of the project proposal
offer of the loan, acceptance and execution of the loan agreement
project implementation, monitoring and supervision
socio-economic impact assessment after project completion
Figure SEQ Figure * ARABIC 1 Project Lifecycle of LOCs
Requirements for import of goods and services in India
The LOCs is only for the project exports and the import of goods and services from India.
Minimum 75% of goods and services covered under the LOCs must be sourced from India.
The LOCs may finance up to hundred percent value of the contract on CIP/CIF/CFR/FOB basis.
Exim Bank’s own commercial lines of credit
To promote Indian products and services, the Exim Bank of India have been extended the LOCs to the economically strong and developing countries. The Exim bank finance all the items eligible for exportation under the “Foreign Trade Policy”. The LOCs are typically linked to LIBOR rates and carry a tenor up to 7 years.
Figure SEQ Figure * ARABIC 2 Process of Commercial LOCs Mechanism
Requirements for import of goods and services in India
The advance payment should be at least 10% of the value of the contract
The LOCs may finance up to 90% value of contract on CIP/CIF/CFR/FOB basis.
Pre-shipment inspection of goods is mandatory.
The projects which are secured by the Indian companies have been supplemented the efforts of the host country governments in achieving their developmental objectives. To quote an example, the Exim bank has extended two lines of credit which is aggregating USD167.40 million to the Government of Sri Lanka for the upgradation of southern railway corridor from Colombo to Matara in Sri Lanka.
Figure SEQ Figure * ARABIC 3 The Colombo – Matara Railway Line
As a result, the recipient countries can set up the development projects in a variety of sectors such as power generation, agricultural mechanization, transportation-rail and road by using the Indian technology which is found to be appropriate, adaptive, and affordable.
1.2.2 Buyer Credit
Buyer’s credit is a loan facility offered by Exim Bank of India to overseas buyer in order to finance their import of capital goods and services from India. Through this credit facility, the overseas buyer are allowed to import goods and services from India on deferred payment terms. The Indian exporters can enjoy the benefits of reduced transaction costs and the complexities of international trade transactions through this loan facility. Therefore, they can gain a competitive edge in the international market and utilize their working capital for scaling up their core business. For foreign customers, the presence of medium and long-term financing facilities can ensure the smooth execution of theirs projects.
The Exim bank will make the advance payments to Indian exporters on behalf of the overseas buyer.
The buyer’s credit mechanism can be extended to more than one overseas subsidiaries of any Indian company.
It provides non-resource finance to Indian exporters by converting deferred credit contract into cash contract.
Since it is a non-letter of credit transactions, the letter of credit charges is not required.
Figure SEQ Figure * ARABIC 4 Process flow of buyer credit
Buyer’s credit is only for the foreign project company which has the intention to award the project execution to an Indian project exporter.
The facility is available to all kinds of projects that is exported from India.
Buyer’s credit under NEIA
The National Export Insurance Account (NEIA) is a trust established by the Ministry of Commerce and managed by the Export Credit ;Guarantee Corporation of India (ECGC). The Exim bank offer the buyer’s credit facility under NEIA for the purpose of promoting the India’s project exports to traditional and new markets in developing countries. It provide the credit to overseas sovereign governments and the governments are able to import the Indian goods and services from India on deferred credit terms for a medium to long-term period. The tenor of buyer’s credit can normally be up to 15 years.
Under the Buyer’s Credit- NEIA Programme, the Indian project exporter is backed by a tailor-made financial solution that meets the funding needs of the project, without affecting the balance sheet. As a consequence of this, the Indian company will not be affected by the commercial and political risks and can concentrate fully on the timely and satisfactory execution of the project.
The borrower must be overseas sovereign government or a government owned entity.
The amount of loan cannot more than 85% of the contract value.
The sovereign guarantee is needed where the borrower is other than the foreign government.
A minimum of 75% of the goods and services under this credit facility should be exported from India.
1.2.3 Overseas Investment Finance
For the purpose of enhancing export opportunities for India and driving the economic growth of the country, the Exim bank attempt to integrate foreign trade and investment opportunities in order to build value over the long-term. The Exim bank encourages Indian companies to invest abroad for seeking not only the resources, markets, efficiencies, but also the strategic assets.
The Exim bank provides access to foreign markets by offering:
Term loans to Indian companies for:
The equity investment in their overseas Joint Venture (JV) and Wholly Owned Subsidiaries (WOS)
The onward lending to their overseas JV and WOS
Term loans to overseas JV/WOS of Indian companies for part financing:
Working capital requirements
Capital expenditure for acquisition of assets
Acquisition of brands, patents or rights
Guarantee facility to overseas JV and WOS for raising working capital
This financing is available in Indian Rupee or foreign currency to the overseas entity
Commercial interest rates are charged on the term finance
The security comprises appropriate charges on assets of the overseas entity and the pledge of shares held by the Indian promoter in the overseas venture
The tenor of loans is generally 5 to 7 years with suitable moratorium.
1.2.4 Corporate Banking
The Exim bank provides a range of financing programmes to the Export Oriented Units (EOUs) in order to enhance the export-competitiveness of Indian companies. These financing programmes cater to the term loan requirements of Indian exporters for financing new project, purchase of equipment, expansion, modernization, and carry out the research and development.
Finance for corporates
Research and Development Finance for Export Oriented Units
The objective of the R;D Financing Programme is to encourage the Indian exporters to put more effort in the R;D by developing new products and processes which will enhance their export capabilities. This financing can be extended to any export oriented company.
Export oriented firms with exports of at least 20% of annual turnover
More than 80% of the total project cost can be funded.
Security should comprise appropriate charges on assets and corporate guarantee.
Lending Programme for Export Oriented Units
The Exim bank offers the term loan to help the Indian export-oriented companies to finance their capital expenditures. The Indian companies can enhance their capabilities and the international competitiveness through this lending programme. In this programme, the loans and guarantees are extended for the expansion and diversification projects. This includes the purchase of equipment, export product development and the technology export marketing.
Import Finance Programme
The Exim bank provides a wide range of financing facility to the borrower companies at all stages of business cycle. The companies in manufacturing sector that have only domestic operation and no exports are eligible for this programme. They can finance from Exim bank for the import of equipment and machineries for the domestic projects.
Production Equipment Finance Programme
This finance programme is extended to export oriented companies to enhance the export capability creation by financing non-project related equipment procurement. The Exim bank provides loan for the acquisition of ancillary equipment such as the equipment for packaging and quality assurance. This loan is flexible and can be used for equipment procurement for capacity up-gradation.
Finance for SMEs
Lending Programme for Financing Creative Economy
It is believed that the creative industry in India has the potential, skill and talent for job creation. There is a huge untapped potential for the generation of exports from this creative industry segments such as design, film and video, performing arts, craft and so forth. In order to provide a strategic that focus to this sector, the Exim bank introduced this programme specifically for financing the creative economy.
Finance for Grassroots Enterprises
The Exim bank have introduced the GRID programme in order to support the enterprises based out of rural areas in India. The grassroots initiatives and technologies which have the export potential have been promoted in this programme. It helps the artisans, producer groups, and small enterprises to realize the remunerative return on their products by facilitating the export of these units.
The Exim bank provides the tailor-made financial products to cater to their needs at various stages of business cycle. The covered areas involving the capacity building, working capital finance, technology up-gradation, design and packaging improvement and creation of export capability.
It must be a legal entity registered under the state or central government
It must have a proven track record
It should be working with the communities at grassroots level for promoting the income generating activities based on traditional skills
1.2.5 Project Exports
The Exim bank provides funded and non-funded facilities to export of projects and services classified as:
Civil engineering and construction projects
Including civil works, steel structural works, and associated supply of construction material and equipment for various infrastructure projects.
Involving the supply of equipment and some related services such as design, civil construction, detailed engineering and power transmission and distribution.
Involving the export of the capital goods and industrial manufactures. For example, the supply of stainless steel slabs and diesel generators.
Technical and consultancy service contracts
Including the provision of know-how, skills and personnel training. The typical examples for services contract including the project implementation services, supervision of erection of the plants, management contracts, and finance and accounting system.
Pre-shipment finance is loans or credit provided by the Exim bank to the company in manufacturing stage. This credit facilities enable the Indian exporters to procure the raw materials, to carry out the manufacturing process, and to meet other financial costs of the business. The foreign currency pre-shipment credit facility is also provided to import the raw materials and other inputs for export production.
Post-Shipment credit finances the export bill after the shipments have been made. The purpose of post-shipment credit is to enable the Indian exporters to extend the term credit to importers at the post-shipment stage. The Exim bank offers this facility individually or collaborates with a commercial bank on a case-to-case basis.
Indian project exporters can use these facilities to support their export financing
The following securities can be provided:
Charge on fixed and floating assets of customer
Export Project Cash Flow Deficit Finance (EPCDF)
This facility is extended to Indian project exporters who executing project export contract overseas. It helps to take care of the temporary cash flow deficits during the contract execution period.
The following entities can benefit of this financing facility:
Indian companies which is executing contracts overseas, but financed by multilateral funding agencies
Contracts for which export benefits are available under the Foreign Trade Policy
Non Funded Facilities
Advance Payment Guarantee (APG)
Issued to the Indian project exporters to secure a project mobilization advance as a percentage (10-20%) of the contract value which is generally recovered on a pro-rata basis from the progress payment during the project execution period.
Performance Guarantee (PG)
The exporters can be availed of the performance guarantee up to 5-10% of the contract value. It is valid until the completion of maintenance period or the grant Final Acceptance Certificate (FAC) by the overseas client.
Retention Money Guarantee (RMG)
This enables the Indian exporters to get the release of retained payments from the client prior to the issuance of Final Acceptance Certificate (FAC).
For instance, in lieu of security deposit for expatriate labour and equipment.
Indian project exporters securing overseas or deemed export contracts.
The expected dollar cost of buying SF 5,000 if I choose to hedge via call option on SF.
Total option premium= ($0.05×SF 5,000)
In 3 months, $250 is worth:
= $250× 1 + (0.0612 ×3 months)
Since the expected future spot rate of $0.63/SF is less than the call option rate of $0.64/SF, I do not expect to exercise the option. Rather, I expect to buy SF at $0.63/SF.
The expected amount that I will spend to buy SF 5,000 is:
Therefore, the total expected cost of buying SF 5,000 is:
= $3,150 + $253.75
The future dollar cost of meeting this SF obligation if I decide to hedge using a forward contract.
Forward rate = $0.63/SF
Thus, the total cost = SF5,000 ×$0.63
The future spot exchange rate that will make me be indifferent between the forward and option market hedges.
Forward rate = Call option
Assume that ? represents the break-even future spot rate.
$3,150 = SF 5,000 ? + $253.75
SF 5,000 ? = $3,150 – $253.75
? = $2896.25SF 5,000= $0.57925/SF
The option will not be exercised at the break-even future spot rate.
Illustrate the future dollar costs of meeting the SF payable against the future spot exchange rate under both the options and forward market hedges.
If the SF appreciates beyond $0.64/SF, which is the exercise price of the call option, I will exercise the option and buy SF 5,000 for $3,200. The total cost of buying SF 5,000 will be $3,453.75.