Import & Export Financing

IMPORT FINANCING Background Like other(a) developing countries, Pakistans import snoot transgresss exports. Therefore, it faces scarcity of unconnected supercede to meet its import requirements. According to daily DAWN fittingd eighteenth November 2012, Pakistans hostile exchange reserves were USD 13. 84 peakion at the week ended as on 9th November 2012. Gap between the import and export bills is parti completelyy covered by regulations, get words and measures exercised by State depository financial institution of Pakistan and parti entirelyy by the international doctrine, aid, loan agencies like International m matchlesstary Fund (IMF), World cuss, Asian Development Bank (ADB).State Bank of Pakistan keeps control at a date, over this imbalance by imposing money margin restrictions on import of general items from time to time. This is done in order to restrict imports and to eachow import of just now necessary items to follow out genuine requirements and to disco urage import of non-commercial and luxury items. CASE get a line On 1st February 2012, restriction on import of CNG cylinders and kits was imposed by giving medication of Pakistan in view of government policy to discourage use of CNG as a fuel due to its short supply and ever wage increase penury.No importer is allowed to import CNG cylinders & kits up till now which is being restricted by SBP & custom authority. Foreign trade involves m either risks because of different locations /countries of importer and exporter. Both the parties argon doing their businesses in different countries where different laws & regulations apply and it is difficult to settle both dispute regarding goods quality and earnings settlement between importer and exporter. For safeguarding interest of twain importer and exporter, savings slangs involve in these performances for smooth settlement between the parties. IMPORTERSAny carcass who imports the take goods into the country is called an impor ter. The importer has to support the exporter for the value of goods in foreign exchange. Importers argon classified into three categories i) Commercial sector importer i-e. a firm, institution, organization, person or group of persons registered as an importer is called commercial importer. ii) Industrial sector importer i-e. any industrial unit which is registered as importer comes at a lower place this category. iii) Public sector importers i-e. the organizations owned by the government which import capital / consumer commodities as per their requirement.Usually, these organizations be not registered as regular importer and their requests for spread garner of credit is routed through SBP. garner of citation (L/C) garner of Credit is a written undertaking by a wedge given to the vendor/exporter (beneficiary) at the request and instructions of the emptor/importer ( applier) to pay at plentifulness or at a definable future date a stated sum of money against the neede d documents. The documents include commercial invoice, certificate of origin, transfer of training document relating to the mode of transport used (Airway Bill, Bill of Lading, Railway communicate, Truck Receipt, and so forth and other documents required as per legal injury of garner of credit. Parties to Letter of Credit In documentary credit operations, utmost number of parties involved ar as under i) Appli contributet (Opener of L/C) The applicant of a credit is an importer or emptor who requests his bank to issue documentary credit in upgrade of the seller /exporter. ii) Issuing Bank (Opening Bank) The issuing bank is also called importers bank. At the request of the applicant, this bank issues the credit in accordance with the instructions of the applicant in favor of the exporter. The garner of credit is move to the bank in the exporter/sellers country. ii) Advising Bank Advising bank is also known as transmitting or newspaperman bank in the sellers country. Issuing bank forwards the advice of the credit by mail or by any sum of tele-transmission (i-e. cable, telex, SWIFT, etc. ) to a correspondent bank where the beneficiary business exists. Normally, all L/Cs be sent via SWIFT i-e. Society for Worldwide International Financial Transactions. iv) Beneficiary (Seller or exportinger) The person or body receiving the earn of credit from the importer and/or in whose favor letter of credit is issued is called beneficiary. v) Confirming BankConfirming bank is the bank which at the specific request of the issuing bank adds its substantiation to a letter of credit. Adding confirmation constitutes a definite undertaking of the positive(p) bank, in addition to that of the issuing bank. vi) Negotiating Bank Negotiating Bank is the bank which receives the documents against letter of credit as authorized bank. This bank has to give value for drafts and/or documents under L/C conditions. Negotiating Bank may or may not be the Advising Bank. This bank examines the documents against L/C, and if found in order, conducts the documents and makes payment to the seller.The negotiating bank dispatches the documents to the Issuing Bank yelling reimbursement from the bank as mentioned in the L/C and as agreed between the two banks. The Negotiating Bank should find out before lodgment of reimbursement claim that all terms of letter of credit make water been complied with. vii) Reimbursing Bank Reimbursing bank is the bank which, on behalf of the inception bank, honors the reimbursement claim lodged by the Negotiating Bank. MODES OF PAYMENT OF L/Cs There ar iv modes of payments of letters of credit as detailed under (i) L/C acquirable by NegotiationIf L/C provides for dialogue to pay without recourse to drawers and/or bonafide holders in terms of credit. Negotiation means the payment of value for draft(s) and/or documents by the bank authorized to negotiate complying with the terms of L/C. (ii) L/C available by sufferance In epis ode the credit calls for a use draft and is available by acceptance on the issuing bank, and the seller submits all the documents including use bill of exchange to a nominated or another bank complying all the terms and conditions of the credit, the seller receives acceptance of the payment at due date date.However, under a separate arrangement, he may get his usance draft discounted by the bank in order to meet his notes flow requirements. In such pillow slip, seller has to bear discount charges. (iii) L/C available by Sight Payment If the beneficiary of letter of credit is to obtain payment immediately on presentation of stipulated documents, it is the sight letter of credit. In this case the exporter draws a sight or demand draft payable at the counters of the advising bank or the bank contract in the letter of credit.The draft is paid on presentation provided that all the other terms of L/C have been complied with. (iv) L/C available by Deferred Payment In this case, L/C disruption bank has to effect payment subsequently a period specify in the L/C, estimated as to the number of days after the date of presentation of documents or after the date of commitment. Such L/C does not require drafts to be drawn or presented alongwith other documents. RETIREMENT OF DOCUMENTS When the documents are received from foreign bank, L/C gap bank affixes dak Received stamp and enters the homogeneous in Dak Received Register.The duplicate set of documents, received by the bank, is unploughed with original set of documents and duplicate should be separate from the original. The bank verifies that all the documents are received as specified in the forwarding roll of the negotiating/exporters bank. plot scrutinizing the documents, it is also ensured that all the documents have been received as per terms of L/C. The retirement of documents can be make by the following means Through debit to the nodes tarradiddle Through Trust Receipt Facility (FTR) offere d by the bank. Through pay against Imported Merchandise (FIM)THROUGH DEBIT TO CUSTOMERS ACCOUNT In case customer/importer has sufficient funds to settle the bill, Cost memorandum is prepared and amount in foreign currency is converted into Pak Rupees at Selling TT & OD rate of exchange. Any foreign correspondent charges and service charges are added to it. Customer issues cheque / authority letter to debit his account for bill amount plus mark-up and other charges. After receiving the amount, human activity documents are endorsed by two authorized signatories and the same are delivered to customer against proper acknowledgement.In case, importer has not sufficient funds to settle the bill, he can avail finance from bank to settle the claim. Credit facilities available to the importer are explained hereunder A. FUND BASED FACILITIES 1. pay AGAINST TRUST RECEIPT (FATR) If customer desires to retire the documents through Trust Receipt facility, a request letter to this effect is o btained from him. In this case, bank releases documents of the goods to importer so that he may abstemious the goods from custom authorities. Payment is settled by the bank and reimbursement is made to foreign bank.The bank has lien on receivables in this case and importer repays the bank finance after sale of the goods. Trust Receipt should not be allowed against utilisation L/C unless specific approval from the authority is held. Following documents are obtained before cathartic the documents on Finance Against Trust Receipt ? Letter of Request from the customer / importer ? Bill of Exchange duly accepted by the political party ? Demand Promissory Note ? Trust Receipt ? substantiating (if any) as per limit approval ? notice ? Agreement of Mark-up The Trust Receipt facility can scarcely be extended upto 45/60 days or as per terms of sanction. . FINANCE AGAINST IMPORTED deal (FIM) This is a sale transaction at a price in return agreed upon between the bank and the importer . The sale price consists of value of goods or documents of title to goods and margin of profit. The sale price is payable by the vendee on deferred payment basis either in part or in lump sum. This facility is granted for a period of 60 days or as per sanction advice. Following documents are obtained from the party ? Letter of Request from the customer / importer ? Demand Promissory Note ? Letter of Indemnity for clearance of consignment ?Letter of Pledge ? Agreement of Mark-up This grapheme of facility is against pledge of imported stocks and its process / transaction flow is uniform to that of Self-Liquidating Inventory Finance. TRANSACTION FLOW Goods imported through L/C, when founder the port in importers country, there is a process of releasing the goods from custom authorities. For this purpose Clearing Agents on the panel of bank. The clearing federal agent after clearing the goods, transports the same via Goods Transport Companies to the name and address of the import er. At importers business premises / factory, etc.Bank Muccadam is available to take over the custody of the goods as soon as these are received at the site. These goods are kept under pledge arrangement and bank takes effective control & self-control of the imported goods. B. NON-FUND BASED FACILITIES 3. USANCE LETTER OF CREDIT This pillow slip of letter of credit is issued with a condition that payment pass on be made after more or less specified period of time i-e. 180 days, 365 days, etc. The bank undertakes to pay the exporter for the value of goods at some later date in order to facilitate the importer to arrange funds for settlement of the transaction.Usance letter of credit is in truth useful facility in which importer not only avails the opportunity of time available to pay his liabilities but also he saves borrowing costs due to difference of LIBOR and KIBOR. At present KIBOR is upto 10% whereas LIBOR is ranging from 0. 5% to 1% for the last two to three years. In cas e of Usance L/C, the importer will have to pay the value of goods alongwith some additional profit/surcharge levied by the exporter (which is included in the Invoice Value) for allowing repayment period to importer. exporter will calculate this additional profit on transaction on the basis of LIBOR (0. 70%) instead of KIBOR (10%). In case importer avails the credit lines to settle the import bill from his local bank, he will bear the borrowing/financing cost on the basis of KIBOR which is farther above than LIBOR. 4. SHIPPING GUARANTEE The shipping batten is issued in favor of the local shipping agents for obtaining delivery order to clear goods from port / customer authorities in the absence of original shipping documents of L/Cs. This guarantee is issued on prescribed from provided by the shipping company.This guarantee is signed by the importer and counter-signed by the bank. Following documents are required from the customer at the time of issuance of shipping guarantee ? Lett er of Request from the customer / importer ? copy of Invoice ? Copy of Bill of Lading / transport document ? fix up of the shipping guarantee to be issued ? Counter guarantee in favor of the bank duly signed by the customer ? Letter of undertaking regarding exchange rate fluctuation ? Undertaking to accept the draft in case of usance L/C ? Undertaking to accept all discrepancies in the documentsLiability under the shipping guarantee shall be reversed only after the surrender of the original bill of lading against which guarantee has been issued and the pass along of original guarantee from the shipping company. On receipt of original bill of lading, this is forwarded to the shipping company alongwith request to return the original guarantee. This facility is very short term nature normally 30 days. B. EXPORT FINANCE In order to strengthen its redact in the international markets, Pakistan has to distort for improving its balance of trade by increasing its exports.As such exports have been the top priority of the governments agenda to improve the position of foreign exchange earning of the country. Banks have a very important role to draw in trade activities of the country. Banks act as agents for both the importers and exporters and play important role in the development of countrys trade. While handling export transactions, Credit Manager and/or Export module of the bank must always keep into consideration the following ? Export Policy Order of the government for the financial year ?Guidelines/instructions of Export Promotion Bureau ? State Bank of Pakistan Foreign Exchange Circulars ? Banks Foreign Exchange Regulations and FEX circulars ADVISING OF EXPORT LETTERS OF CREDIT letter of credit received from foreign banks are advised to the beneficiaries in Pakistan through L/Cs advising departments of the bank. All L/Cs received are carefully scrutinized for their authenticity adhering to the terms & conditions and complying with our Foreign Exchange Regul ations and International laws & publications (UCP 500). wee-wee ENo person can export any goods from Pakistan unless he is duly registered as an exporter with Export Promotion Bureau under the adaption Importer & Exporter Order 1952. Blank E Forms are issued to exporters, against written request, free of any charges. In order to export, the exporter will provide details on E form in respect of goods, quantity, invoice value of goods, terms of sale, destination and name & address of the importer. This E form is the main document to calculate value of goods exported and is used to control the export of any item from Pakistan.CASE STUDY During October 2012, Government of Pakistan allowed export of 200,000 tons of starting line from Pakistan with a condition that one sugar manufactory can export maximum upto 10,000 tons of sugar. This maximum quantity of sugar (10,000 tons) exported by any single sugar mill to be controlled by the E Form submitted by the exporting sugar mill. In cas e of any effort of sugar mill to exceed export from 10,000 tons, SBP can very easily trace this from the record of E form available in its record. In the following paragraphs, we will treat the types of financing available to exporter. . FOREIGN DOCUMENTARY BILLS PURCHASED AGAINST L/Cs This type of financing is referred to as Foreign Bills Purchased (FBP). Only those documents are purchased which are passable and which conform to the terms of letters of credit. The documents are forwarded to the L/C opening bank and payment is received through banks foreign correspondents maintaining NOSTRO account in various currencies. Following documents are submitted by the exporter for negotiation ? Original Letter of Credit (L/C) ? Documents of title to goods (Bill of lading, Airway bill, etc. ? Bill of Exchange (B/E) ? Commercial Invoice ? Certificate of Origin ? Packing dip ? Insurance Policy ? Any other document as per terms of L/C FBP is practical face of Factoring in which bank purcha ses the receivable of the client/exporter after making payment and takes the responsibility of show of the receivable at its own end. The exporter transfers all rights of ownership of the documents to the bank and dictum to claim reimbursement from the L/C opening bank. This transaction is to be handled with radical care, vigilance and diligence.All the financial and commercial documents are scrutinized as per terms & conditions of L/C. Documents after careful scrutiny are forwarded to the L/C opening bank and claim of reimbursement is made as well. On realization of the bill, FBP is settled /adjusted. 2. FOREIGN DOCUMENTARY BILLS FOR COLLECTION Financing against foreign bills is made on export bills which are drawn under Letter of credit and are sent for payment under documentary collection. This is a sale transaction at a price mutually agreed upon between the buyer (bank) and seller (exporter).The documents are sold to the bank and sale proceeds will be credited in the account of seller (exporter). This type of export finance is termed as Finance against Foreign Bills (FAFB). All other procedures of FAFB are similar to FBP except that under FAFB in the event of non-payment of the bill by L/C opening bank or importer, the exporter undertakes to repurchase the same documents at banks marked up price. FAFB is the practical example of Lien on Receivables. 3. FINANCE AGAINST PACKING CREDIT (FAPC)Packing Credit is a sort of pre-shipment or pre-export finance, extended to prime & valued customers (exporters) against valid letter of credit / firm contract order. The finance is provided to the exporter for the following ? Purchase of goods ? charge charges ? Clearing forwarding charges ? Export duty, etc. ? Packing requirements Finance against boxing credit is granted for 180 days or upto the period the shipment of goods is affected whichever is earlier. Lien is marked on the Letter of Credit / degenerate Contract in order to prevent negotiation of documents.