IGNOU : M.COM : IBO 4 : UNIT 10 : Q - 3. Enumerate the methods of import finance. Describe the procedure of financing import under letter of credit.

 

Ans. METHODS OF IMPORT FINANCE

The methods of import financing include: financing under L/C, financing against' bills under collection, financing against deferred payment, financing under foreign credit and finance by EXIM Bank of India. Let us discuss them in detail.

Financing Import Under Letter of Credit

Letter of credit can be defined as a commitment of bank to pay the seller of goods or services a certain amount provided he presents stipulated documents evidencing the shipment of goods or the performance of services within a prescribed period of time, As a credit instrument and as means of making and securing payment, the letter of credit is an essential instrument for conducting world trade today. It fulfils all the requirements provided the regarding its use are stated in clear and unambiguous terms.

Import letters of credit financing involves three principal stages:

i) Requesting bank to open a letter of credit

ii) Retiring documents under letter of credit

iii) Import Trust receipt facility.

Each time a L/C is opened, the importers has to file a formal stamped "Letter of credit application and Agreement" in the prescribed form. The application should set forth the precise terms and conditions under which the importer wishes his bank to establish the credit, and describe the documents covering the goods purchased which the bank is to receive in exchange for payments.

As the correct opening of the credit is the first essential to the ultimate success of the transaction and as the LIC will-be issued on the basis of information supplied by the importer in the L/C application. it is absolutely necessary that the information supplied by him must be complete arid precise. After due scrutiny of the application form, the relevant letters are issued by the bankers subject to the Uniform Customs And Practice for Documentary Credits, in order to guard against confusion and misunderstanding.

Financing against Bills under Collection

In the case of imports not covered by letters of credit, the documents are forwarded by a bank in the supplier's country, known as the collecting bank, for collection of proceeds from the importer and payment to the supplier through the remitting bank. In such cases, the collecting bank would examine the documents and the instructions stated in the covering schedule to ensure that all the stated documents have been received intact and the bill of lading and the bill of exchange are endorsed in its favour or blank endorsed to enable the bank to handle the documents. The bank than presents the documents to the importer on payment (in case of sight or DIP Bill) or against written acceptance (in case of usance or D/A bill). Where the importer is eligible to receive the documents only on payment, he can avail an import loan or a trust receipt facility, as discussed before. Obligations of various parties involved are provided in Uniform Rules for Collection (URC) Publication NO. 322 issued by International Chamber of Commerce, Paris.

Sometimes, shipping documents may be sent by the exporter directly to his importer. In such a case, the bank may receive clean bills for collection of proceeds. In such cases, banks are required to call for documentary evidence of imports such as custom noted invoice, exchange control copy of bill of entry and import license, if any.

Payment for bills in respect of imports through post can also be arranged through a bank. In such cases, tile relative postal receipts must be produced as evidence of shipment through post and an undertaking to submit postal wrappers within three months from the date of wrappers.

Financing Imports against Deferred Payment

Imports under deferred payment implies that the supplier has agreed to supply goods on credit terms extending beyond six months. In such cases, authorized dealer has to refer each deferred payment case to RBI for prior approval of advance payment, bank guarantee and installments (principal and interest) with documents viz. exchange control copy of import license, if any, contract copy arid statement of desired facilities.

Appraisal for issue of guarantees or loans is similar to term finance. For importing under deferred payment, the importer should have sufficient cash generated to pay the due installments. He should arrange for payment of advance and down payments from his own resources which would cover bank's margin requirement. Imported machinery has to be hypothecated to the bank and the importer should counter guarantee the transaction.

Financing under Foreign Credit

Government of India gets assistance in the form of loans and development credits from international financial institutions as also foreign governments. These loans are of two types . tied loans and loans in free foreign currencies. Terms and conditions of each loan along with detailed instructions regarding the procedure to be followed for opening letters of credit submission of documents etc. are set out in public notices issued by DGFT. RBI also issues circulars for each foreign credit giving important instructions relating to SLICII imports.

. Payment under foreign credit may be made under (a) letter of commitment method or (b) reimbursement method. Under the letter of commitment procedure, remittances from India for the relative imports are not permitted. The importer in India obtains a letter of commitment from the Government of India after finishing a bank guarantee for payment of rupee equivalent of the import value. The importer furnishes the letter of commitment to the bank opening L/C. Then the usual procedure follows. The shipping documents are delivered to the importer on payment / acceptance. Where no L/C is opened at all and on receipt of document covering imports rupee deposits are made to Government account by the importer through the bank.

Under the reimbursement method, the aid giving the country makes available to the Government of India on production of evidence of payment of imports. Hence, payment to the suppliers is made by the L/C opening bank through the normal banking channels and reimbursement is by the Government of India by submitting the required documents.

Import Loans by Export-Import Bank of India

Bank finances imports from third countries required for executing projects overseas for which contracts have been won by Indian exporters.

Regarding imports into India, Ex-im Bank finances such imports which are export-related, i.e. imports by Export Oriented Units, import of computer systems for development and export of software, import of plant, machinery, technology for up gradation /expansion of production capability for export markets.

Ex-im Bank also finances bulk imports of consumable inputs and canalized items. Under this scheme, promissory notes drawn in favour of commercial banks by their importer borrowers are discounted, Ex-im bank will issue letter of commitment for finance on request from commercial bank indicating its requirement. The quantum of finance depends on the condition that import order should not be less than Rupees one Crore.