Overview of Trade Finance
Trade finance encompasses various financial instruments and products that facilitate international trade by managing the risks associated with cross-border transactions. It bridges the gap between the time goods are shipped and when payment is received, providing working capital solutions for both exporters and importers.
In India, trade finance is regulated by the Reserve Bank of India (RBI) and includes pre-shipment finance (packing credit), post-shipment finance, export credit facilities, and various government schemes to promote exports. The sector plays a crucial role in making Indian exports competitive in the global market.
Key Components of Trade Finance
Pre-Shipment Finance
Finance provided before shipment for manufacturing, processing, and packing of goods for export.
Post-Shipment Finance
Finance provided after shipment against export documents until realization of export proceeds.
Export Credit
Credit facilities extended to exporters at competitive interest rates, often linked to international benchmarks.
Credit Insurance
ECGC policies that protect exporters against commercial and political risks of non-payment.
Pre-Shipment Finance (Packing Credit)
Packing Credit is a pre-shipment finance facility provided to exporters for financing the purchase, processing, manufacturing, or packing of goods prior to shipment. It helps exporters meet their working capital requirements during the production cycle.
Rupee Packing Credit
- • Provided in Indian Rupees
- • Interest subvention available (2-3%)
- • Linked to bank's MCLR/EBLR
- • Effective rate: 7-11% for eligible exporters
- • Running account facility available
PCFC (Foreign Currency)
- • Provided in USD, EUR, GBP, JPY
- • Linked to LIBOR/ARR + spread
- • Typically cheaper than rupee credit
- • Rate: SOFR/ARR + 1.5% - 3%
- • Natural hedge if exports in same currency
Features of Packing Credit
| Feature | Details |
|---|---|
| Purpose | Raw material purchase, processing, packing, labor costs, warehousing |
| Amount | Up to FOB value of export order |
| Period | Generally 180 days; 270 days for diamond sector |
| Repayment | From export proceeds; can be rolled over with valid reasons |
| Security | Export order/LC, stock hypothecation, ECGC cover |
Post-Shipment Finance
Post-shipment finance is provided to exporters after the shipment of goods, against export documents. It bridges the gap between shipment and realization of export proceeds, which can range from 30 to 180 days depending on the payment terms.
Types of Post-Shipment Finance
Negotiation of Export Bills under LC
Bank purchases documents under confirmed export LC and provides immediate payment after deducting negotiation charges.
Purchase/Discount of Export Bills
For bills not under LC. Bank purchases or discounts the bills with or without recourse to the exporter.
Advance against Bills for Collection
Finance provided against documents sent for collection through banking channels.
Advance against Duty Drawback, etc.
Finance against receivables from government such as duty drawback, GST refunds.
Important Considerations
- Period: Maximum 180 days (365 days for project exports and certain commodities)
- Documents: Export invoice, BL/AWB, packing list, GR form, insurance certificate
- EDPMS: All export transactions must be reported in Export Data Processing and Monitoring System
- Realization: Export proceeds must be repatriated within 9 months (extendable)
Export Credit Facilities
Foreign Currency Export Credit
- • Benchmark: LIBOR/ARR (SOFR for USD)
- • Spread: 1.5% - 3.5% based on risk
- • All-in-cost ceiling as per FEMA
- • Currently ~6-7% for quality borrowers
- • Suitable for exporters with forex exposure
Rupee Export Credit
- • Linked to bank's MCLR/EBLR
- • Interest subvention for eligible categories
- • Effective rate: 7-11% with subvention
- • No forex risk
- • Suitable for domestic input exporters
Export Credit Refinance Schemes
RBI provides refinance facilities to banks against their export credit portfolio to ensure adequate liquidity for export financing:
- RBI Export Credit Refinance: To scheduled banks against eligible export credit
- EXIM Bank Refinance: Direct refinance to banks at competitive rates
- SIDBI Refinance: For MSME export credit portfolio
Buyers Credit & Suppliers Credit
Buyers Credit
Foreign currency loan to Indian importer from overseas bank arranged by the importer's bank in India.
- • Purpose: Payment for imports
- • Tenor: 1-3 years (trade), up to 5-7 years (capital goods)
- • Rate: LIBOR/ARR + 1.5-3%
- • Cost-effective compared to rupee financing
- • RBI approval required for >US$20 million
Suppliers Credit
Credit extended by overseas supplier to Indian importer, arranged by the supplier's bank.
- • Purpose: Deferred payment for imports
- • Built into pricing or explicit interest
- • Simpler process than buyers credit
- • May be costlier than buyers credit
- • Supplier controls the financing
Export Forfaiting
Export Forfaiting is the non-recourse purchase of medium-term trade receivables by a forfaiter. It allows exporters to receive immediate cash against deferred payment exports without recourse to them.
Key Features
- Without Recourse: Exporter is free from risk of non-payment
- Medium Term: Generally 180 days to 5 years
- Full Financing: Up to 100% of face value minus discount
- Avalized Bills: Bills of Exchange accepted/guaranteed by buyer's bank
- Fixed Cost: Discount rate known upfront
Process
Government Schemes
Interest Equalization Scheme
Government scheme providing interest subsidy on pre and post-shipment rupee export credit:
- • MSME manufacturers: 2% subvention
- • Merchant exporters: 2% for specific tariff lines
- • All exporters: 3% for 410 employment-intensive tariff lines
- • Automatic application by banks at disbursement
SIDBI EXIM Scheme
Financial assistance for MSME exporters:
- • Term loan up to ₹10 crore
- • Working capital for exports
- • Concessional rates for SC/ST/women entrepreneurs
- • Export marketing fee reimbursement
- • Trade fair participation support
Market Access Initiative (MAI)
Financial assistance for market development activities, participation in trade fairs, and buyer-seller meets.
Market Development Assistance (MDA)
Assistance for MSME exporters to participate in trade fairs abroad and delegations.
EPCG Scheme
Zero duty import of capital goods for pre-agreed export obligations.
RoDTEP
Remission of Duties and Taxes on Exported Products - replacing MEIS.
Interest Rates & Charges
| Facility | Interest Rate | Remarks |
|---|---|---|
| Rupee Packing Credit | 7% - 11% | With interest subvention |
| PCFC (Foreign Currency) | LIBOR/ARR + 1.5% - 3% | ~6-7% current rates |
| Post-Shipment (Rupee) | 8% - 12% | With subvention for eligible |
| Post-Shipment (FC) | LIBOR/ARR + 1.5% - 3% | Benchmark linked |
| ECGC Premium | 0.3% - 1.5% | Of invoice value |
| Processing Fee | 0.1% - 0.5% | One-time |
Eligibility & Documents
Eligibility Criteria
- ✓ Valid IEC (Import Export Code)
- ✓ AD Code registration
- ✓ GST registration
- ✓ Satisfactory track record
- ✓ Firm export order or LC
- ✓ ECGC cover (recommended)
Documents Required
- ✓ Export order/LC
- ✓ Packing credit application
- ✓ Stock statements
- ✓ Shipping documents (BL/AWB)
- ✓ Export invoice
- ✓ Insurance policy
- ✓ EDPMS reference
- ✓ Financial statements