Import & Export Financing

IMPORT FINANCING Background Like another(prenominal) developing countries, Pakistans after(prenominal)math philippic overhauls exports. Therefore, it faces scarcity of remote convert to meet its import requirements. According to daily DAWN examined eighteenth November 2012, Pakistans unusual exchange reserves were USD 13. 84 menuion at the week ended as on 9th November 2012. Gap between the import and export bills is parti tout ensembley covered by regulations, suss outs and measures exercised by State coast of Pakistan and parti on the wholey by the international credit entry, aid, loan agencies like International pecuniary Fund (IMF), World argot, Asian Development Bank (ADB).State Bank of Pakistan keeps control at a prison term, over this imbalance by imposing exchange margin restrictions on import of general items from time to time. This is d matchless in order to restrict imports and to all in allow import of provided necessary items to touch genuine require ments and to discourage import of non-commercial and luxury items. CASE require On 1st February 2012, restriction on import of CNG cylinders and kits was imposed by brass of Pakistan in view of government policy to discourage use of CNG as a fuel due to its short supply and ever procession ask.No importer is allowed to import CNG cylinders &038 kits up till now which is being restricted by SBP &038 custom authority. Foreign trade involves m two risks because of different locations /countries of importer and exporter. Both the parties ar doing their businesses in different countries where different laws &038 regulations apply and it is difficult to settle all dispute regarding goods quality and honorarium settlement between importer and exporter. For safeguarding interest of both importer and exporter, jargoning companys involve in these proceedings for smooth settlement between the parties. IMPORTERSAny corpse who imports the requisite goods into the country is called a n importer. The importer has to cover the exporter for the value of goods in foreign exchange. Importers ar 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 beneath 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 argon not registered as regular importer and their requests for fountain garner of credit is routed done SBP. earn of ascribe (L/C) earn of Credit is a written confinement by a sticking company given to the seller/exporter (beneficiary) at the request and instructions of the purchaser/importer (appli houset) to pay at study or at a calculable future date a stated sum of money against the mandatory documents. The documents include commercial invoice, certificate of origin, convey document relating to the mode of transport used (Airway Bill, Bill of Lading, Railway recognise, Truck Receipt, etc. and other documents required as per name of garner of credit. Parties to Letter of Credit In nonsubjective credit operations, uttermost number of parties involved are as under i) Applicant (Opener of L/C) The applicant of a credit is an importer or purchaser who requests his bank to issue documentary credit in elevate 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 estimate of the exporter. The letter of credit is move to the bank in the exporter/sellers country. ii) Advising Bank Advising bank is also known as transmitting or interchangeable bank in the sellers country. Issuing bank forwards t he advice of the credit by mail or by any convey of tele-transmission (i-e. cable, telex, SWIFT, etc. ) to a correspondent bank where the beneficiary business exists. Normally, all L/Cs are sent via SWIFT i-e. Society for Worldwide International Financial Transactions. iv) Beneficiary (Seller or exporter) The person or body receiving the letter 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 stop to a letter of credit. Adding confirmation constitutes a definite undertaking of the convinced(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 a gainst L/C, and if found in order, pull offs the documents and makes payment to the seller.The negotiating bank dispatches the documents to the Issuing Bank aiming reimbursement from the bank as mentioned in the L/C and as agreed between the two banks. The Negotiating Bank should turn back before lodgment of reimbursement claim that all terms of letter of credit drive been complied with. vii) Reimbursing Bank Reimbursing bank is the bank which, on behalf of the inauguration bank, honors the reimbursement claim lodged by the Negotiating Bank. MODES OF PAYMENT OF L/Cs There are 4 modes of payments of letters of credit as detailed under (i) L/C getable by NegotiationIf L/C provides for dialog 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 credence In persona the credit calls for a white plague draft and is available by acceptance on the issuing bank, and the seller submits all the documents including usage 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 silver flow requirements. In such result, 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 undertake 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 open up bank has to effect payment after a period stipulate in the L/C, draw a bead ond as to the number of days after the date of presentation of documents or after the date of dispatch. 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 opening bank affixes palas Received stamp and enters the corresponding in Dak Received Register.The duplicate set of documents, received by the bank, is unplowed 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 memorial of the negotiating/exporters bank. piece 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 do by the following means Through debit entry to the guests accounting Through Trust Receipt Facility (FTR) offered by the bank. Thr ough pay against Imported Merchandise (FIM)THROUGH DEBIT TO CUSTOMERS ACCOUNT In case guest/importer has sufficient funds to settle the bill, Cost memo is prepared and amount in foreign currency is converted into Pak Rupees at Selling TT &038 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, call 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 pay 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 obtained from him. In this case, bank releases documents of the goods to importer so that he may crown 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 phthisis L/C unless specific approval from the authority is held. Following documents are obtained before release 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 ? flyer ? Agreement of Mark-up The Trust Receipt facility can plainly be extended upto 45/60 days or as per terms of sanction. . FINANCE AGAINST IMPORTED switch (FIM) This is a sale transaction at a price mutually agreed upon between the bank and the importer. The sale price consists of value of goods or d ocuments of title to goods and margin of profit. The sale price is payable by the buyer 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 face of facility is against pledge of imported stocks and its process / transaction flow is resembling to that of Self-Liquidating Inventory Finance. TRANSACTION FLOW Goods imported through L/C, when area 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 component after clearing the goods, transports the same via Goods Transport Companies to the term of the importer. At importers business premises / factory, etc.Bank Muccadam is ava ilable 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 &038 self-discipline of the imported goods. B. NON-FUND BASED FACILITIES 3. USANCE LETTER OF CREDIT This image of letter of credit is issued with a condition that payment give be made after approximately 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 case of Usance L/C, the importer leave alone have to pay the value of good s alongwith some additional profit/surcharge levied by the exporter (which is included in the Invoice Value) for allowing repayment period to importer. exportinger 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 off the beaten track(predicate) above than LIBOR. 4. SHIPPING GUARANTEE The shipping vouch 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 ? Letter of Request from the customer / impo rter ? retroflex of Invoice ? Copy of Bill of Lading / transport document ? initialize 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 put across 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 put down in the international markets, Pakistan has to touch for improving its balance of trade by increasing its exports.As such exports have been the top priority o f the governments agenda to improve the position of foreign exchange earning of the country. Banks have a very important fibre to bet 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 mental faculty 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 &038 conditions and complying with our Foreign Exchange Regulations and Intern ational laws &038 publications (UCP 500). bound ENo person can export any goods from Pakistan unless he is duly registered as an exporter with Export Promotion Bureau under the fitting Importer &038 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 &038 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 stops from Pakistan with a condition that one sugar submarine sandwich 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 case of any eff ort 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 talk of 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 assignable 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 appoint ? Insurance Policy ? Any other document as per terms of L/C FBP is practical event of Factoring in which bank purchases the receivable of the client/exporter after making payment and takes the responsibility of assemblage of the receivable at its own end. The exporter transfers all rights of ownership of the documents to the bank and effectiveness to claim reimbursement from the L/C opening bank. This transaction is to be handled with natural care, vigilance and diligence.All the financial and commercial documents are scrutinized as per terms &038 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 &038 valued customers (exporters) against valid letter of credit / firm contract order. The finance is provided to the exporter for the following ? Purchase of goods ? commitment charges ? Clearing forwarding charges ? Export duty, etc. ? Packing requirements Finance against packing material 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 preve nt negotiation of documents.