Interest Rate Structure On Export Credit In Foreign Currency1 Essay Example

are authorized to extend PCFC in one convertible currency for an export order invoiced in another convertible currency, allowing exporters to have operational flexibility. For instance, an exporter can obtain PCFC in US Dollars for an export order invoiced in Euro. The risk and cost of the cross-currency transactions will be borne by the exporter.

iv) Banks can extend PCFC for exports to ACU countries. (v) The benefit to exporters will only be received after the realization of the export bills or when the resulting export bills are rediscounted on a 'without recourse' basis. Source of Funds for Banks (i) Banks can use the foreign currency balances in Exchange Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts RFC(D), and Foreign Currency (Non-Resident) Accounts (Banks) Scheme for financing pre-shipment credit in foreign currency. ii) Banks can also use the foreign currency balances in Escrow Accounts and Exporters Foreign Currency Accounts, ensuring that the account holders' fund requirements for permissible transactions are met and the maximum balance limit under the broad-based facility is not exceeded.

(iii) Foreign currency borrowings are allowed for banks. Banks can arrange borrowings from overseas banks without prior approval from the RBI. These borrowings are intended for the grant of Post-shipment Credit in Foreign Currency (PCFC) to exporters. The rate of interest on these borrowings should not exceed 0.75 percent over six months LIBOR/EURO LIBOR/EURIBOR.

Banks must only use these borrowings to provide loans to exporters under the PCFC. However, if the overseas bank sets a minimum amount for drawals that is not too large, any unused portion can be managed by the bank using its foreign exchange position and Aggregate Gap Limit (AGL). Additionally,

any pre-payment made by the exporter can also be accommodated within the bank's foreign exchange position and AGL limits.

(c) Banks in India can borrow from other Indian banks if they are unable to raise loans from overseas independently, as long as the cost to the exporter does not exceed 0.75 percent above LIBOR/EURO LIBOR/EURIBOR. The spread between the borrowing and lending bank is determined by the banks involved. iv) If exporters have arranged for suppliers' credit to obtain imported inputs, banks can only provide the PCFC facility to finance domestic inputs for exports.

(v) Banks can also utilize foreign currency funds borrowed under paragraph 4. 2(i) of Notification No. FEMA. 3/2000 RB dated May 3, 2000, as well as foreign currency funds obtained through buy-sell swaps in the domestic forex market to provide Pre-shipment Credit in Foreign Currency (PCFC). These activities must comply with the Aggregate Gap Limit (AGL) approved by RBI (FED).

(i) The spread for pre-shipment credit in a foreign currency will be tied to the international reference rate such as LIBOR/EURO LIBOR/EURIBOR (6 months).

(ii) The interest rate charged to the exporter should not exceed 0.75 percent over LIBOR/EURO LIBOR/EURIBOR, excluding withholding tax.

(iii) Typically, LIBOR/EURO LIBOR/EURIBOR rates are available for standard periods of 1, 2, 3, 6, and 12 months. If PCFC is needed for periods less than 6 months, banks may provide rates based on the standard period. However, when quoting rates for non-standard periods, banks must make sure that the rate is lower than the rate for the next upper standard period.

(iv) Banks have the option to collect interest on PCFC at monthly intervals. This can be done by utilizing the

proceeds from the sale of a foreign currency, utilizing balances in EEFC accounts, or utilizing the discounted value of export bills if PCFC is liquidated within the monthly rest for interest collection.

Period of Credit:

i) Initially, PCFC will have a maximum period of 180 days, similar to rupee credit. Any extension of the credit will be subject to the same terms and conditions applied for extending rupee packing credit. Additionally, an extra interest cost of 2 percent above the prevailing rate for the initial period of 180 days will be charged at the time of extension.

ii) Further extensions will be subject to the terms and conditions specified by the respective bank. If no export takes place within 360 days, the PCFC will be adjusted at T.

The selling rate for the currency in question can impact banks' ability to repay loans or lines of credit raised abroad, along with the interest, without obtaining prior approval from RBI. Banks are allowed to extend PCFC within 180 days by rolling over the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate, plus a permitted margin of 0.

The full amount or part of the PCFC can be used to finance domestic input, in which case banks can use appropriate spot rates. The minimum lots for transactions can be determined by the banks based on their operational convenience and availability of resources, taking into consideration the needs of small customers. Banks should simplify their procedures to avoid the need for separate approval for PCFC once the packing credit limit has been authorized, and to ensure that disbursement is not delayed at the branches.

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The PCFC Account can be liquidated in two

ways. First, it can be liquidated by using the proceeds from exporting documents on their submission for discounting/rediscounting under the EBR Scheme mentioned in paragraph 2.2. Additionally, it can be liquidated through a grant of foreign currency loans (DP Bills). The amount can also be repaid/prepaid from the balances in the EEFC Account or from the rupee resources of the exporter, to the extent that actual exports have taken place. Secondly, any excess amount of packing credit above F can also be considered for liquidation.
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O. B. value In certain cases, (such as agro-based products like HPS Groundnut, defatted; deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc. where packing credit required is more than FOB value), PCFC will only be available for the portion of the produce that can be exported. (iii) Substitution of order/commodity Repayment/liquidation of PCFC can be done with export documents related to any other order covering the same or a different commodity exported by the exporter.

When allowing for the substitution of a contract, banks need to ensure that it is both commercially necessary and unavoidable. Additionally, banks should be satisfied with valid reasons for why a Post-shipment Credit in Foreign Currency (PCFC) for a specific commodity cannot be liquidated through the normal method. Whenever possible, substitution of the contract should be allowed if the exporter maintains an account with the same bank or if they have obtained approval from consortium members, if applicable.

In the event of cancellation or non-execution of an export order for which the exporter had availed of PCFC from the bank, or if the exporter is unable to carry out the export order for any reason, it

is acceptable for the exporter to repay the loan and accrued interest by purchasing foreign exchange (principal + interest) from the domestic market through the bank. In these cases, interest will be charged on the equivalent rupee amount of the principal at the rate applicable to 'Export Credit Not Otherwise Specified' (ECNOS) during the pre-shipment stage, in addition to a penal rate of interest determined by the bank from the date of advance after adjusting for recovered PCFC interest.

Banks have the freedom to decide the interest rate for ECNOS at the pre-shipment stage, as long as it is within the PLR and spread guidelines. They are also allowed to transfer the amount to the overseas bank if the PCFC was made available to the exporter from that bank's line of credit. However, the banks can only extend PCFC to exporters who had a genuine reason for canceling their previous PCFC.

Additionally, banks are permitted to provide the 'Running Account' facility under the PCFC Scheme for all commodities, similar to the facility available under rupee credit. To be eligible, exporters must prove their need for the 'Running Account' facility and have a good track record.

In all instances where the Pre-shipment Credit 'Running Account' capability has been provided, it is necessary to present the appropriate Letters of Credit (L/Cs) or firm orders within a reasonable timeframe. The PCFC will be deducted in the order in which it was obtained. Additionally, the PCFC can also be deducted using the proceeds from export documents for which no PCFC has been utilized by the exporter. Banks should carefully monitor the submission of firm orders or L/Cs by

exporters, as well as ensuring that the funds are used for their intended purposes. Any diversion of funds for domestic use must be prevented. If PCFC drawdowns are not utilized for export purposes, penalties should be applied and the 'Running Account' facility should be revoked for the exporter in question.

Banks must accept any prepayment made by the exporter under the PCFC scheme within their foreign exchange position and Aggregate Gap Limit (AGL) mentioned in paragraph (b) above. With the addition of the 'Running Account' facility, there is a likelihood of mismatches occurring for a longer duration, resulting in additional costs for the banks. In case of a prepayment period exceeding one month, banks have the right to charge exporters for the funding cost associated with absorbing these mismatches. Moreover, as per paragraph (iii) above, PCFC can be extended in any convertible currency for an export order invoiced in a different convertible currency. Banks are allowed to let exporters book forward contracts based on confirmed export orders before availing PCFC, and cancel the contract at prevailing market rates upon availing PCFC. Additionally, banks can permit customers to seek cover in any permitted currency of their choice actively traded in the market, ensuring that the customer is exposed to exchange risk in a permitted currency in the underlying transaction.

(iii) Banks can ensure compliance with the basic requirement of exposing the customer to exchange risk in the underlying transaction at various stages of export finance while still allowing forward contracts within the scheme.

Sharing of EPC under PCFC: (i) The rupee export packing credit can be shared between an export order holder and the manufacturer of the goods to

be exported. (ii) Similarly, banks can also extend PCFC to the manufacturer based on a disclaimer from the export order holder through their bank. PCFC granted to the manufacturer can be repaid through transfer of foreign currency from the export order holder by utilizing PCFC or by discounting bills.

Banks must ensure that there is no double financing involved in the transaction and that the total duration of packing credit is limited to the actual production cycle of the exported goods. The facility may be extended if the banker or leader of a consortium of banks is the same for both the export order holder and the manufacturer, or if the banks involved agree to such an arrangement where different bankers are used for the export order holder and manufacturer. The sharing of export benefits will be determined by mutual agreement between the export order holder and the manufacturer. The provision of PCFC (packing credit in foreign currency) may be made available to both the supplier EOU/EPZ/SEZ unit and the receiver EOU/EPZ/SEZ unit. The PCFC for the supplier EOU/EPZ/SEZ unit will cover the supply of raw materials/components used in the production of goods that will ultimately be exported by the receiver EOU/EPZ/SEZ unit.

The PCFC extended to the supplier EOU/EPZ/SEZ unit must be liquidated by receiving foreign exchange from the receiver EOU/EPZ/SEZ unit. The receiver EOU/EPZ/SEZ unit can use PCFC for this purpose. The requirement to liquidate PCFC by paying in foreign exchange will not involve negotiating export documents, but transferring foreign exchange from the banker of the receiver EOU/EPZ/SEZ unit to the banker of the supplier EOU/EPZ/SEZ unit. Consequently, there will generally not be any post-shipment

credit for the supplier EOU/EPZ/ SEZ unit. In all such cases, banks must ensure that there is no double financing for the same transaction. It is important to note that the PCFC for the receiver EOU/EPZ/SEZ unit will be liquidated by discounting export bills.

• PCFC may be allowed only for ‘deemed exports’ for supplies to projects financed by multilateral/bilateral agencies/funds.
• PCFC released for ‘deemed exports’ should be liquidated by a grant of foreign currency loan at the post-supply stage, for a maximum period of 30 days or up to the date of payment by the project authorities, whichever is earlier.
• PCFC may also be repaid/ prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent supplies have actually been made.
• Refinance Banks will not be eligible for any refinance from RBI against export credit under the PCFC scheme and, as such, the quantum of PCFC should be shown separately from the export credit figures reported for the purpose of drawing export credit refinance.
• The applicable benefits such as credit of eligible percent of export proceeds to EEFC Account etc.o the exporters will accrue only after realization of the export bills and not at the stage of conversion of pre-shipment credit to post-shipment credit (except when bills are discounted/ rediscounted 'without recourse').
• Surplus of export proceeds available after adjusting relative export finance and credit to EEFC account should not be allowed for setting-off of import bills.
• ECGC cover will be available in rupees only, whereas, PCFC is in foreign currency.

In order to evaluate how well banks are providing export

credit, the value of PCFC in rupees can be considered. The Exim Policy 2002-2007 includes the Diamond Dollar Account (DDA) Scheme, which applies to firms/companies involved in the buying/selling of rough or polished diamonds and diamond-studded jewelry. These firms/companies must have a proven track record of at least three years in diamond import or export, with an annual average turnover of Rs. [original text not complete].

Banks can allow businesses who have earned 5 crore or more in the previous three licensing years to operate through designated Diamond Dollar Accounts (DDAs). The DDA Scheme permits banks to use the proceeds from the sale of rough, cut, and polished diamonds between DDA holders to liquidate PCFC granted to a DDA holder. Post-Shipment Credit refers to loans or advances provided by an institution to exporters from India from the date of extending credit after shipment of goods until the date of export proceeds realization.

Under the Rediscounting of Export Bills Abroad Scheme (EBR), banks can rediscount export bills internationally at rates linked to international interest rates during the post-shipment stage. It is easier to have a facility against a portfolio of eligible bills than to have rediscounting facility on a bill-by-bill basis. However, there is no restriction if a bank arranges bill-to-bill rediscounting facility for a specific exporter, especially for high-value transactions. Banks can arrange a "Bankers Acceptance Facility" (BAF) for rediscounting export bills without any margin, provided they are covered by collateralized documents.Each bank can set its own BAF limit or limits with an overseas bank, rediscounting agency, or another agency such as a factoring agency (if factoring arrangement is "without recourse" only). Exporters can also independently arrange

for a line of credit with an overseas bank or another agency (including a factoring agency) to discount their export bills, following certain conditions: (1) The discounting of export bills by exporters with an overseas bank or any other agency must be done through the designated bank branch designated by the exporter for this purpose. (2) If the export bills are routed through a different bank, that bank must first arrange to settle the outstanding amount under the packing credit facility with the designated bank using the proceeds from the rediscounted bills. The borrowing limits set by RBI (FED) for banks will not consider the limits granted to them by overseas banks or discounting agencies under BAF. The eligibility criteria for the scheme mainly cover export bills with a usance period of up to 180 days from the shipment date, including transit and grace periods if applicable.

There is no restriction on including demand bills in the Scheme of Rediscounting, as long as the overseas institution approves. The facility can be offered in any convertible currency. Banks can provide the EBR facility for exports to ACU countries. The BAF Scheme can be centralized at a designated branch for operational convenience, but other branches of the bank can also operate the scheme according to their internal guidelines. Banks are allowed to use foreign exchange resources from EEFC, RFC, and Foreign Currency (Non-Resident) Accounts (Banks) Scheme to discount usance bills and keep them in their portfolio without resorting to rediscounting.

Regarding demand bills, they may need to go through the existing post-shipment credit facility or foreign exchange loans provided by banks in the schemes mentioned above. To promote the

growth of the local market for rediscounting export bills, it is important to establish and develop an active interbank market. While banks may hold bills in their portfolio without rediscounting, it is beneficial for them to have access to the local market in case of necessity. This way, the country can save foreign exchange costs related to rediscounting. Additionally, if a bank has a balance available in its limit, it can offer the rediscounting facility to another bank that has exhausted its limit or cannot arrange for such a service.

Banks in India have the option to borrow from other banks if they are unable to secure loans from overseas or if they do not have branches abroad. However, the cost to the exporter should not exceed 0.5 percent above LIBOR/EURO LIBOR/EURIBOR (excluding withholding tax). The specific spread between the borrowing and lending bank is determined by the banks involved. Banks are also allowed to utilize foreign currency funds borrowed under the provisions of notification No. FEMA 3/2000 RB dated May 3, 2000, as well as foreign currency funds generated through buy-sell swaps in the domestic forex market for discounting/rediscounting Export Bills, as long as they adhere to the Aggregate Gap Limit (AGL) approved by RBI (FED). It is acknowledged that it may be challenging to obtain the 'without recourse' facility from abroad under BAF or any other arrangement.

Therefore, the bills may be rediscounted 'with recourse', but an AD is allowed to arrange a 'without recourse' facility if competitive terms are available. Accounting Aspects The exporter will receive the Rupee equivalent of the discounted value of the export bills, which should be used to pay off

the outstanding export packing credit. Banks can use appropriate spot rates for the discounting of bills/extension of foreign exchange loans (DP bills) as it will be in actual foreign exchange.

The bank may hold the Rupee equivalents of discounted amounts/foreign exchange loans separately from the existing post-shipment credit accounts. There will be no change in the way overdue bills are crystallized; however, if a bill is overdue, the bank can charge 2 percent above the rate of rediscounting of foreign exchange loans from the due date to the date of crystallization. The interest rate for post-shipment credit in Rupees will be based on the RBI interest rate directive from the date of crystallization. Preference will be given to account holders for the grant of packing credit in foreign currency (PCFC).

Gold cardholders who have consistently paid their export bills on time may be eligible for foreign currency credit cards to meet urgent payment obligations. Banks should prioritize meeting the Post-Shipment Credit in Foreign Currency (PCFC) requirements of Gold Card holders over non-export borrowers when granting loans against FCNR(B) funds. In deserving cases, banks may also consider offering term loans in foreign currency using funds from FCNR(B), RFC, and other sources. However, banks should not use overseas borrowings under the 25 percent window or other overseas borrowings to grant such loans.

The credit given to Indian exporters should have interest rates that do not exceed LIBOR + 0.75 percent. If the bank does not have sufficient dollars to lend to exporters at a specific time, a service charge of 0.1 percent may be imposed on inter-bank foreign currency borrowings for this purpose. The interest rate structure for export

credit in foreign currency, particularly in the schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and 'Rediscounting of Export Bills Abroad' (EBR), allows banks to determine interest rates based on prevailing LIBOR, EURO LIBOR, or EURIBOR rates. The interest rates for different types of credit are as follows (percent p.).

(i) Pre-shipment Credit (a) Up to 180 days not exceeding 0.75% over LIBOR/EURO LIBOR/EURIBOR Beyond 180 days and up to 360 days Rate for an initial period of 180 days prevailing at the time of extension plus 2. percentage points, i.e. (i) (a) above + 2.0%
(ii) Post-shipment Credit (a) On-demand bills for transition exceeding 0.

75% period (as specified by FEDAI) over LIBOR/EURO LIBOR/ EURIBOR. (b) Against usance bills (credit for a total period comprising usance period of export bills, transit period as specified by FEDAI, and grace period wherever applicable) Up to 6 months from the date not exceeding 0. 75% of shipment over LIBOR/EURO LIBOR/ EURIBOR. (c) Export bills (demand rate for (ii) (b) above usance) realized after due date plus 2. 0 percentage but up to date of crystallization points. (iii) Export Credit Not Otherwise Specified (ECNOS) a) Pre-shipment credit free @. (b) Post-shipment credit free @. Banks are free to decide the rate of interest being rupee credit rate keeping in view the PLR and spread guidelines. Appendix Master Circular Export Credit in Foreign Currency List of Circulars consolidated by the Master Circular No. Circular No. data subject IECD No.

12/04.02.02/2003-0418.5.

The Gold Card Scheme for Exporters was introduced in 2004 under IECD No. 12/04. The scheme aimed to provide export credit in foreign currency and had sources of funds outlined in IECD No.

02/02/2002-0331.1.2003.

On 9/04, 02/02/2002-0331, 10/2002, the Export Credit department conducted the liquidation of Packing Credit and converted the drawers under rupee packing credit into PCFC. This was carried out by the IECD.

No. 21/04. 02. 01/2001-0229. 04.

2002 Interest Rates on Export Credit in Foreign Currency IECD. No. 14/04. 02.01/2000-0119. 04. 2001 Interest Rates on Export Credit in Foreign Currency IECD.No.

13/04. 02. 02/1999-200017. 05.2000 Pre-shipment Credit in Foreign Currency (PCFC) provided to exporters operating under the Diamond Dollar Account Scheme IECD.

No. 47/3840/04.02. 01/97-9811. 06. 98Export Credit in Foreign Currency IECD.No.

The date of 28/04/96-9717.04.97 marks the extension of the Facility of Pre-shipment Credit in Foreign Currency (PCFC) IECD, identified as No.

22/04.02. 01/95-9629. 02. 96Export Credit – PCFC IECD.

Number 15/04 dated February 2, 1995 No. 95-9622. The provision of export credit in foreign currency for exports to Asian Clearing Union (ACU) countries is granted through Pre-shipment Credit in Foreign Currency (PCFC) and Export Bills Rediscounting Scheme (EBR) IECD.

EFD. 40/04. 02. 15/94-9518.04. 95Pre-shipment Credit in Foreign Currency(PCFC) - Forward Exchange Cover IECD.

No. 30/04. 02.02/94-9514. 12. 94Relaxations in the Area of Export Packing Credit IECD. No.27/04.

02. 15/94-9514. 11. 94Sharing of Packing Credit under PCFC IECD.

No. 13/04. 02.02/94-9526. 09. 94Pre-shipment Credit in Foreign Currency(PCFC) Scheme – Supplies from EOU/EPZ Unit to another EOU/EPZ Unit IECD.

No.10/04. 02. 15/94-9503. 09.94Export Financing in Foreign Currencies IECD.

No. EFD.43/04.02.15/93-9418.05.94

Pre-shipment Credit in Foreign Currency (PCFC) - Extension of 'Running Account' Facility IECD.

No. EFD. 37/04. 02. 15/93-9430. 03.94Pre-shipment Credit in Foreign Currency(PCFC) - Clarifications/Relaxations IECD.

No. EFD. 32/04. 02. 11/93-9403. 03.

94 Rediscount of Export Bills Abroad and Pre-shipment Credit in Foreign Currency (PCFC) - Withholding Tax 19. IECD. No. EFD.

31/04. 02.15/93-9403. 03. 94 Pre-shipment Credit in Foreign Currency (PCFC) - The

'Running Account' Facility for Export of Diamonds IECD is being extended.

EFD. 30/04. 02. 15/93-9428. 02.94Pre-shipment Credit in Foreign Currency(PCFC) - Clarifications IECD. No.

EFD.21/04. 02. 15/93-9408. 11. 93Pre-shipment Credit in Foreign Currency (PCFC) IECD.No. EFD.

Rediscounting of Export Bills Abroad Master Circular 14/04. 02.11/93-9406. 10. 93;