To protect exporters from the risks of foreign exchange fluctuations and also the costs of currency conversation, the EEFC scheme was introduced in 1992, under which exporters were allowed to retain 15 per cent of their foreign exchange earnings, which was subsequently raised to 50 per cent, in a foreign currency with an authorized dealer. The account may be maintained in any permitted currency and in any form, current, savings without check facility or term deposit. The purpose for which the funds can be used include: business travel, participation in trade fairs and exhibitions, conducting market studies abroad, advertisement for export promotion, publicity materials for brand promotion abroad, agency commission, legal expenses, premium for product liability insurance settlement of warranty claims, registration fees for earnest money to tender inviting authorities and setting up overseas branches/offices abroad by Star trading House, Trading Houses, Export Houses etc,.
It is a means of financing an export transaction involving capital goods and equipment of large value or complete turnkey projects on long term credit. A loan is extended by a bank or other Financial institution in the supplier’s country to the overseas buyer who is thus in a position to pay cash for the supplies received. The loan is guaranteed by the buyer’s bank or often extended to the buyer’s bank itself for the specific purpose in view. Two points have to be noted in this connection: (1) If the supplier fulfils his responsibility he gets his money. (2) It involves no transfer of funds from one country to another. There is no financial involvement for the seller.
Exports on Deferred Payment Terms:
Contracts for export of goods against payment to be received partly or fully after the expiry of the period prescribed for realization of export proceeds (normally 180 days) are treated as deferred payment export contracts. Extension of long term export credit especially for large value supply contracts or projects exports is now an accepted marketing strategy. Indian manufacturers also will have to offer such facilities if they have to compete successfully in international markets. therefore, provision has been made for the extension of medium and long term credit to finance the sale of Indian capital goods represented by machinery equipment and related services. The rate of interest charged is 15 per cent.
Any loan up to Rs 10 crores for financing export of capital goods is decided by a commercial bank which can refinance itself from the Export Import Bank (Exim Bank). In case of export contracts up to Rs 10 crores but not more than Rs 10 crores, the Exim Bank has been given the authority to decide whether export finance could be provided. Contracts above Rs 100 crores need clearance by the Working Group. The Exim Bank conducts credit appraisal and takes on the major share of financing. The credit appraisal includes assessing the nature of export economic status of the buyer and the importing country, the period of repayment and the amount of credit involved. The various criteria adopted for evaluation of projects are: (1) whether the proposed project can be justified on commercial considerations, (2) whether the Indian exporter is capable of executing the contract, (3) whether the foreign borrower is financially sound to repay the credit according the proposed repayment schedule and (4) whether the projects needing credit are economically viable. There is no maximum limit of the finance to be provided.
Security for deferred credit could be provided by (1) letters of credit, (2) pronotes executed by Government buyers / public sector undertaking (3) acceptable bank guarantees, (4) bills duly accepted by banks and (5) any other security considered adequate.
Under the preset regulations depending on the value of the contact the credit period can be extended up to 12 years. There are basically two different mechanisms for offering long term export credit:
1. Supplier’s Credit: Under this system, the Indian exporter will offer credits to the overseas buyer the exporter can, on the other hand, secure reciprocal credits from the commercial banks which, in turn can get refinance from the Exim Bank.
2. Buyer’s Credit: In this case, Exim bank directly extends credit to the importer. The Indian exporters can receive their payments straight away from the Exim Bank.
The vital difference between the two schemes lies in the fact that in the former, the exporter is assuming the credit risks, while in the latter Exim Bank does it.