DOCUMENTATION IN

FOREIGN TRADE

Export documents play a vital role in international marketing as it facilitates the

smooth flow of goods and payment there of across national frontiers. Cateora and
Graham say that ‘the each export shipment involves many documents to satisfy
government regulations controlling exporting as well as to meet requirements for
international commercial payment transactions’. They further writes that ‘the paper work
involved in successfully completing a transaction is considered by mean to be the greatest
of all non-tariff trade barriers. There are 125 different documents in regular or special
use in more then 1000 different forms. A single shipment may require over 50
document and involve as many as 28 different parties and government agencies, or
requires as few as.’ It shows that the exporting activity involves several commercial and
regulatory procedures. These procedures also involve considerable documentation
requirements. Besides, the documentation pertaining to the commercial aspect of the
export business, there are documentation requirements of a regularly nature like excise
clearance, foreign exchange regulations etc.

The most frequently required documents are export declarations, consular

invoices or certificate of origin, bills of lading, commercial invoices, and insurance
certificates. Additional documents such as import licences, export licences, packing lists,
and inspection certificates for agricultural products are often necessary.

Export documentation is, however, complex as the number of documents to be

filled-in is large so able is the number of concerned authorities to whom the relevant
documents are to be submitted. These documents must be properly and correctly filled.
Cateora and Graham opine that ‘incomplete or improperly prepared documents leads to
delay in shipment. In some countries, these are penalties, fines and even confiscation of
goods as results of errors in some of these documents. Export documents are the result of
requirements imposed by the exporting government, of requirements set by the
commercial procedures established in foreign trade, and in some cases, of the supporting
import documents required by the importing government. An exporter should have the
complete knowledge of these documents and he should be well familiar with complete
export procedure.

On the basis of above discussion, export documents may be divided on the

following four categories:
(i) Commercial documents
(ii) Regulatory documents
(iii) Export assistance documents
(iv) Documentation required by importing countries.
 Commercial documents are those documents by which physical transfer of good
and its ownership is transfer to importer and the procedure of export sales is performed.
The major commercial documents are as follows:
(a) Commercial invoices
(b) Bill of exchange.
(c) Bill of lading.
(d) Marine insurance policy.

Regulatory documents are the documents which are required for complying with
the rules and regulations governing export trade transactions. The major regulatory
documents are as follows:

(a) Foreign exchange regulations.

(b) Customs formalities.
(c) Export inspections etc.

In export assistance documents, those documents are involved which are required
for claming assistance under the various export assistance measures.
Documentation required by importing countries are:
(a) Certificates of origin.
(b) Consular invoice.
(c) Quality control certificate etc.

Main documents used in export transactions: The main documents used in an export
transaction are as follows:

1. Commercial Invoice: This is the basic document in an export

transaction. According to Cateora and Graham, ‘every international transaction requires a
commercial invoice, that is, a bill or statement for the goods sold. This documents often
serves several purposes; some countries require a copy of customes clearance, and it is
one of the financial document which contains all the information which are required for
the preparation of all other documents. It is, thus, a document of contents. “A commercial
invoice is a bill for the goods from the buyer to seller. It contains a description of goods,
the address of buyer and seller, and delivery and payment terms. Many governments use
this form to assess duties.”

There is no set format of this invoice. The exporter may design his own form.
Some countries, however, prescribe their own forms. In such case, the exporter has
necessarily to use the form prescribed by the importing country. The commercial invoice
gives the description of following things:

• Invoice Number
• date of dispatch.
• goods description.
• price charged.
• the terms of shipments.
 • the marks and numbers on the packages containing the merchandise.
• date, name and address of both seller and buyer.
• Name of the shipping vessel.
• Port of debarkation.
Commercial invoice may be prepared according to mutual agreement between the
buyer and seller. According the Price, the invoice may be of the following types.

(a) Free on board or F. O. B. : Free on board at a named inland point of origin, at

a named port of exportation, or at a named vessel and port of export. The price includes
the cost of goods and delivery. All other charges are the buyer’s concern. In simple
words, under F.O.B. quotation, the exporter will deliver the goods free on board a ship as
per contract as the port named; that is, to say he will pay all expenses and give delivery of
goods on the board of the ship. The buyer must take responsibility from then on, and
must pay for freight, insurance and all subsequent expenses.

(b) Cost, Insurance and Freight (C.I.F.): C.I.F. to a named overseas port of
import. A.C.I.F. quote is more meaningful to the overseas buyer because it includes the
costs of goods, insurance, and all transaction and miscellaneous charges to the named
place of debarkation. The buyer responsible for loss or damage after the goods are
delivered to the shipowner and must pay all expenses, custom duties etc., on arrival at the
port of destination.

(c) Cost and Frieight (C&F): C & F to a named overseas port. The price includes
the cost of goods and transportation costs to the named place of debarkation. The cost of
insurance is borne by the buyer.

(d) Free Along Side (F.A.S.) F.A.S. to a named U S port of export. The price
includes cost of goods and charges for delivery of the goods alongside the shipping
vessel. The buyer is responsible for the cost of loading onto the vessel, transportation and
insurance.

(e) Ex. (named point of Origin): The price quoted concerns costs only at the point
of origin. All other charges the buyer’s concern.

Consular Invoice: Some countries require consular invoice. A consular invoice

sometimes is required by countries as a means of monitoring imports. Government can
use the consular invoice to monitor prices of imports and to generate revenue for the
embassies that issue the consular invoice. In those countries where ad valorem duties are
charged, it is in the interest of the importer to present to the custom authorities to the
importing country, the document called ‘Consular invoice’, in order to save time and
trouble while taking the delivery of the goods. This invoice has to sent by the exporter
who fills in a special form and gets it duly certified by the counsal of the importing
country stationed in the exporting country. The exporter is required to pay a prescribed
fee for obtaining this invoice. The exporter has to submit four copies of the commercial
invoice to the mission of the importing country with the requisite amount of fee.
 Performa Invoice: ‘A proforma invoice is an invoice, like a letter of
intent, from the exporter to the importer outlining the selling terms, price and delivery if
the goods are actually shipped. If the importer like the terms and conditions, he will send
purchase order and arrange for payment. At that point, the exporter can issue a
commercial invoice is simply a temporary commercial invoice which is sent by the
exporter to importer. This covers contemplated shipment which may or may not be made
in future. An importer may require it for the following two reasons:

(a) It helps him to obtain an import license.

(b) It helps in opening a letter to credit in the favour of exporter.

2. G.R.Form : This form has been prescribed by the Reserve Bank of India under
FERA to ensure that the foreign exchange receipts in respect of exports are impatriated to
India. It is prepared in duplicate and it submitted to the custom authorities at the port of
shipment. This authority verifies if (value declared by the exporter) and send one copy of
Reserve Bank of India and second copy of exporter.

3. Letter of Credit:- “A letter of credit is a document containing the

guarantee of a bank to honour drafts drawn on its by an exporter, under certain conditions
and upto certain amounts, provided that the beneficiary fulfills the stipulated conditions.”
The letter of credit is an assurance that the bill will be paid by the bank if it is a sight bill
or accepted by the bank if it is a time bill. Insurance of letter of credit by a bank in favour
of an exporter substitutes the credit of the individual importer by its own credit and
thereby gives the exporter guarantee assurance of payment. It is a popular method of
securing payment and most important single document in international trade. It forms the
basis of very large amount of world trade. Cateore and Graham. Opines that “letter of
credit shift the buyer’s credit risk to the bank issuing the letter of credit. When a letter of
credit is employed, the seller ordinarily can draw a draft against the bank issuing the
credit and receive dollars by presenting proper shipping documents. Except for cash in
advance, letters of credit afford the greatest degree for protection for the seller.

A letter of credit it of two types: irrevocable and revocable. An irrevocable letter

or credit means that once that seller has accepted the credit, the buyer can not alter it in
any way without permission of the seller. On the other, a revocable letter of credit may be
cancelled at any time by banker without giving pre- intimation. The exporter does not
favour this letter of credit as it is liable to bring him into trouble on any time. In other
words, an irrevocable letter of credit can not be cancelled by the bank without giving
prior notice and is, therefore, safer than the revocable letter from the point of view of
exporter. The exporter should carefully examine the terms and conditions of the letter of
credit to ensure should carefully examine the terms and conditions of the letter of credit
to ensure:

(a) that he can meet them, and

(b) That they confirm to the basic contract he has entered into with the
importer
 If there are any differences, he should get in touch with the bank and the
Importer to arrange for an amendment. Some of the discrepancies found in documents
that can delay in honoring drafts or letter of credit including the following.
(i) Insurance defects, such as inadequate coverage, no endorsement, or counter signature,
and a dating other than the bill of lading.

(ii) Bill of lading defect, such as the bill lacking ‘on-board’ endorsement or signature of
carrier, missing an endorsement, or failing to specify prepaid freight.

(iii) Letter of credit defects, such as an expired letter or one that is exceeded by the
invoice figure.

(iv)Invoice defects, such as missing signatures or failure to designate terms of shipment

as stipulated in the letter of credit.

4. Bill Of Exchange: When a draft is drawn on a foreign bank, it is

known as a foreign draft or bill of exchange. A bill of exchange is, thus a means of
collecting payment from the foreign buyer through the banking channel. It is also method
of extending credit. Cateora and Graham say that ‘in letter or credit, the credit of one or
more banks is involved, but in the use of bill of exchange, the seller assures all risks until
the actual dollars are received. The typical procedure is for the seller to draw a draft on
the buyer and present this with the necessary documents to the seller’s bank for
collection. The documents required are principally the same as for letter of credit. On
receipt of draft, the bank forwards it with the necessary documents to a correspondent
bank in the buyer’s country; the buyer is then presented with the draft for acceptance and
immediate or later payment with acceptance of the draft, the buyer receives the properly
endorsed bill of lading that is used to acquire the goods from the carrier.
There are the following important types of bill of exchange:

(i) Sight Bill of Exchange: A sight bill is one which is required to

be paid by the drawee immediately on presentation of the bill. In order words, a sight bill
requires acceptance and payment on presentation of the bill and often before arrival of the
goods. Here, the format of this bill is given below:
1550
Park Street
Stamp London
July 15,2003
Sixty (60) days after sight of this First Bill of Exchange (Second and third of this
same tenor and date unpaid), pay to the Punjab National Bank or order the sum of one
thousand five hundred Pounds Sterling only, value received.

To
Messers Hiralal Motilal
81, Kalba Devi Road Martin & Co.
Mumbai
 (ii) Arrival Bill: An arrival bill requires payment be made on arrival of the goods.

(iii) Date Bill: A date bill has an exact date for payment and in no way is affected
by the movement of the goods. Time designations may be placed on sight and arrival bills
to stipulate a fixed number of days after acceptance when the obligation must be paid.

(iv) Documentary Bill of Exchange: Under this agreement, the exporter sends
the documents through his bank to be delivered to the importer against the importer’s
acceptance or payment of an accompanying bill of exchange. This bill may be a D/P or
D/A bill of exchange. Here, the proforma of these bills are given below:

D/A or Document against Acceptance Bill

Exchange for
1500 Park Street
Stamp London
July 15, 2003
Sixty(60) days after sight of this First Bill of Exchange (Second and third of
this same tenor and date unpaid), pay to us or our order the sum of one thousand five
hundred Pounds Sterling only shipping documents attached to be surrendered against
acceptance.
To
Messers Ramlal Kishanlal
Chandni Chowk Martin & Co.
Delhi – 6

D/P Documents against Payment Bill

1500 Park Street
Stemp London
July 15, 2003
On demand please pay to the First State Bank of India a sum of one
thousand five hundred Pounds Sterling only against Invoice No. A. 15 and shipping
document enclosed.

To
Messers Ramlal Kishanlal
Chandni Chowk Martin & Co.
Delhi - 6

5. Shipping Bill : This is a custom documents. In facet, it is the main documents

on the basis of which the custom’s permission for export is given. The shipping bill
contains particulars of the goods, the name of the vessel, master or agents, flag, the port
at which goods are to be discharged, the country of final destination, the exporter’s name
and address etc. The exporter is required to fill in three copies of shipping bills, or the
shipping bill must be prepared according to the category of the export goods.

The following three forms of the shipping bill are available with the customs
authorities:

(a) Shipping bill for free goods, for which there is no export duty.
(b) Dutiable shipping bill for gods for which there is export duty.
(c) Duty drawback shipping bill which is required for claming the customes
drawback against goods exported.
Here a format of shipping bill is given below:

SHIPPING BILL
No………………. Date………….
Shipping Bill for dutiable goods
Port of Mumbai Exporter’s Name……………… Address………………….
Name of Vessel Master or Agent Colours Port at which goods
to be discharged

Packages Details of goods to be given separately

for each class or description
Number Mark Quantity Descri- Value Duty
& & ption
Description Number
Unit Amo- Rate Amo- Rate Amo- Country
unt Unt Unt Of Desti-
Rs. Rs. nation
np. np.

Entered……..No……..2003 I/we hereby declare the particulars given above to the true.

Assistant Collector Mumbai……….2003

Of Custom Signature of Exporter or
his Authorized Agent

6. Marine Insurance Policy: The goods that are exported may be subject to certain
maritime perils. The risks of such perils may be covered under marine insurance policy.
Cateora and Graham feel that ‘the risk of shipment due to political or economic unrest
is some countries, and the possibility of damage from see and weather, make it absolutely
necessary to have adequate insurance covering loss due to damage, war, or riots.
Typically, the method of payment or term of sale require insurance of the goods, so few
export shipment are uninsured.’ A policy is a contract and a legal document. An exporter
must put up the marine insurance policy as a collateral security when he gets an advance
against his bank credit.

(7) Bill of Lading: It is a document which is issued by the shipping company

acknowledging that the goods mentioned therein have been placed on board the ship and
an undertaking that the goods in like order and conditions as received will be delivered to
the consignee, provided that the freight specified therein has been duly paid. In other
words, ‘a bill of lading is a receipt for goods delivered to the common carrier for
transportation, a contract for the services rendered by the carrier, and a document of title.

Cateora and Graham Write that the ‘bill of lading is the most important document
required for establishing legal ownership and facilitating financial transactions. It serves
the following purposes:
(i) as a contract for shipment between the carrier and shipper,
(ii) as a receipt from the carrier for shipment, and
(iii) As certificate of ownership or title to the goods.

Bill of lading frequently are referred to as either clean or foul:

(a) Clean Bill of Lading : A clean bill of lading means the items presented to the
carrier for shipment are properly packaged and clear of apparent damage when received.
In other words, a clean bill of lading is one which bears no super-imposed clause or
statement declaring a defective condition of goods or of the packaging or of some other
aspect of consignment.

(b) Four Bill of Lading : A foul bill of lading means the shipment was received
in damaged conditions and the damage is noted on the bill of lading.

Each shipping company has its own bill of lading. The exporter prepares the bill
of lading in the forms obtained from the shipping company or from the agents of the
shipping company. Bill of lading contains the following information:

• Date and place of shipment

• The name of consigner.
• Name and destination of the vessel.
• The description, quality and destination of the goods.
• The marks and numbers.
• The invoice number and the date of esxport.
• The gross weight and net weight.
• The number of packages.
• The amount of freight.

As said earlier that each shipping company has its own bill of lading; where
there is no direct shipping link between the buyer’s port and the seller’s port,
arrangement should be made for the goods to be transferred to a second ship at another
port. In such a case, it is necessary for the exporter to obtain a though bill of lading
covering the whole voyage.

Unless specifically authorized in the credit, bill of lading of the following nature
will be rejected:
(a) Bills of lading issued by forwarding agents.
(b) Bills of lading which are issued under and are subjects to the conditions
of a charter party.
(c) Bills of lading covering shipment by sailing vessels.

A bill of lading that has been held too long before it is passed on to a bank or the
Consignee, is called a state bill of lading. Besides, when freight is paid at the time of
shipment or in advance, the bill of lading is marked. ‘freight paid’; if the freight is not
paid and is to be collected from the consignee on the arrival of the goods, the bill of
lading is marked ‘ freight collect’.

Functions of bill of lading are as follows:

(i) It denotes the contract of carriage of goods entered in by the exporter and
the importer
(ii) It entitles the importer to take the delivery of goods.
(iii) It is a document of title to goods. A possessor of this documents becomes
the owner of goods.
(iv) It is a semi-negotiable instrument.
(v) It is transferable by endorsement and delivery.

Here, the format of Bill of Lading is given below:

BILL OF LADING

SHIPPED on good order and condition by M/s Rathore Brothers & Co. Ltd. In and upon
the “STEAMSHIP JALUSHA” where of is Master for Present voyage Mr. Black and
now riding at anchor in Mumbai and bound for London, 1000 Bales of Cotton Marks,

555
J.A
London

being marked and numbered as stated to be delivered in the like good order and
well conditioned at the aforesaid Port of London (the Act of God, the Enemies of the
Country, Fire, Machinery, Boilers, Steam and all and every other Dangers and Accidents
of the Seas, rivers and Steam Navigation of whatever nature and kind expected) into John
Abbot & Sons; or to their Assigns, Lading Charges and Freight for the said goods paid
with Average as per York, Antewerp Rules, 1924 and charges as accustomed.

IN WITNESS where of the Master of the said ship hath affirmed to three bills of
Lading jail of this Tenor and Date, the one of which three Bills being accomplished, the
other two are to stand void.

Dated at Mumbai 30th October, 2003 J. Black

Value and Contents unknown Master

This bill is issued subject to the contents of 14 and 15 Geo. V.C. 2

8. Mate’s Receipt: This document is got from the caption of the ship or the
mate, who is his assistant, and who can not allow the shipping of the goods unless the
shipper presents to either of them a copy of the shipping bill and the shipping order. The
mate issues a receipt after examining a packing and counting of the packages. This
receipt is called the ‘Male Receipt’.

If the mate is not satisfied with the packing of the goods, a remark to that affect is
made on the receipt. A receipt with this remark thereon is regarded as dirty or foul
receipt.
The exporter must take proper care in packing his goods so as to avoid this
remark on the Mate’s receipt without any bad remark is termed as a claim Mate’s receipt.
This remark is transferred to the bill of lading when the exporter gets it in exchange for
the Mate’s receipt.

Here the format of Mate’s receipts is given below

MATE’S RECEIPT
The Indian Steamship Co. Ltd.
No……………… Port of Mumbai
Voy………………. Date October 28, 2003
Order NO…………….
Ref. No…. …….

Received in apparent good order and condition on board the S.S. Jalusha for
deliver at London the under mentioned goods from M/s :

Marks Quantity Goods are Details Remarks

Said to be Measurement
 555
J.A 1000
Bales Cotton
London

This receipt is to be exchanged for the company’s bill of lading and in the meantime
the goods for which the receipt is issued are held, and will be carried by the company
subject to the conditions set forth on the back hereof.
Signature

Caption the ship

9. Certificate of origin: A certificate of origin indicates where the products originate and
usually is validated by an external source, such as the charter of commerce. It helps
countries determine the specific tariff schedule for import. In other words, a certificate of
origin is a certificate which specifies the country of the production of the goods. This
certificate has also to be produced country may require this procedure. This certificate is
necessity where a country offers a preferential tariff to India and the former is to ensure
that only goods of Indian origin benefit from concession.

Here, a format of certificate of origin is given below:

Certificate of Origin
The undersigned duly authorised by the London Chamber of Commerce hereby
verifies the declaration, made below by………… of ………. In respect of the under
mentioned goods, consigned to ………..at……….via………..and certifies.
Number of Marks Gross Weight Net Weight Description of
Packages Numbers Goods

that the goods specified in the schedule above are of British original production or
manufacture.

No. Of Certificate……………..
………………………………..
Signature of Declarer Seal
Secretary

10. Packing Note and List: An export packing list indicates that the type of
package itemises the material in each individual package indicates the type of package,
and it attached to the outside of the package.
 The shipper or freight forwarder, and sometimes custom officials, use the packing
list to determine the nature of the cargo and whether the correct cargo is being shipped.
The difference between a packing not and a packing list is that the packing note refers to
the particulars of the contents of an individual pack, while the packing list is consolidated
statement of the content of a number of cases of packs.

A packing note include the following things:

• Packing not number.
• the date of packing.
• name and address of the exporter.
• name and address of the importer.
• Order number
• Date.
• Shipment for S/S
• bill of lading number and date.
• Marking numbers.
• Case number to which the note relates.
• Contents of the goods in terms of quantity and weight.
It should be noted here that no particular form has been prescribed for the packing
Note and packing list. Normally, ten copies of the packing note/list is prepared in which
the first is sent with the shipping documents, two copies in advance to the buyer, one to
the shipping agent and the remaining are retained by the exporter.

11. Other documents:

(a) Certificate of inspection: It is a certificate issued by the Export inspection

Agency. This agency certifies that the consignment has been inspected as require under
the Export (quality control and inspection) Act, 1963, and satisfies the conditions relating
to quality control and inspection as applicable to it, and is certified export worthy.
Usually Export Promotion Council does the pre-shipment inspection. Emphasis is on
quality control and not on inspection for export. EIC gives an inspection certificate in
triplicate to the exporter.

(b) G.P.Forms: A GP form is a gatepass for the removal of excisable goods from
a factory or warehouse. Form GP 1 is used for the removal of excisable goods or payment
of duty and form GP 2 is used for the removal of excisable goods without payment of
duty.

(c) Cart Ticket: A cart ticket is prepared by the exporter and includes details of
the export cargo in terms of the shipper’s name, the number of packages, the shipping bill
number, the port of destination, and the number of the vehicle, carrying the cargo.

(d) Custom formalities: Goods may be shipped out of India only after customs
clearance has been obtained. For this purpose, the following documents should be
presented by the exporter to the custom authorities:
 (i) Shipping bill.
(ii) Declaration regarding truth or statement made in the shipping bill.
(iii) Invoice
(iv) GR from.
(v) Export license (wherever required).
(vi) Quality control inspection certificate.
(vii) Original contract, wherever available or correspondence leading to
contract.
(viii) Contract registration certificate.
(ix) Letter of credit.
(x) Packing list.
(xi) AR-4 from
(xii) Any other documents.

(e) License: Export import licenses are additional documents frequently required
in export trade. In those cases, where import licenses are required by the country of entry,
a copy of license of license number is usually required to obtain a consular invoice.
Wherever a commodity requires an export license, it must be obtained before an export.

(f) Shipper’s export declaration: A shipper’s export declaration is used by the

exporter’s government to monitor exports and to compile trade statistics.

(g) Indent or order: An exporter gives a quotation or an offer for sale to the
foreign buyer or importer. It may be in the form of a pro-forma invoice, and offer to sell
but given in the form of an invoice.
The exporter, at first receives the order or indent from the importer or his agent.
The indent contains all important particular of the transaction. Hence, a foreign order is
called an indent.
When a proforma invoice is accepted by the buyer, it becomes a confirmed order.
An exporter is usually treated as confirmed order when letter of credit is established if
favour of the exporter. There may be a formal sale contract also.
(h) Principal export documents: There are eight principal export documents
which the exporter is required to send to the importer. These documents are:

(i) Commercial invoice

(ii) Packing list
(iii) Bill of lading
(iv) Combined Transport Document
(v) Certificate of Inspection/Quality Control
(vi) Insurance policy of certificate
(vii) Certificate of Origin
(viii) Bill of Exchange and Shipment Advice.
Lesson -24
Quality Control and Pr-shipment Inspection
 In today’s sophisticated would market a product can move with any measure of
success only if it is competitive enough in price and quality. Our export can be sustained
and improved only be raising the quality of our product as it would be very difficult to
reduce the price in our present day high-cost economy, with a view to achieve this
objective of raising the quality of our export products the Government of India enacted
the legislation entitled “The Export (Quality Control and Inspection) Act” in the year
1963, and the Export Inspection Council was also set up with effect from 1st January,
1964.
The main function of the Export Inspection Council is to advise the government
with regard to measures to be taken for quality control and pre-shipment inspection of
exportable commodities.
No Consignment of any notified commodity can be exported unless it is
accompanied by a certificate issued by a recognised inspection agency or the article
carries a recognised mark indicting that it conforms to the standard specifications.
A number of existing agencies, both government as well as private have been
recognised under the Act for carrying out pr-shipment inspection of various goods. To
supplement the work of these agencies, the government also established five Export
Inspection Agencies, one each at Bombay, Calcutta, Cochin, Madras and Delhi in 1966
exclusively for export inspection. These agencies work under the administrative and
technical control of the Export Inspection Council.
Striking progress has been made in the field of compulsory pre-shipment
inspection as about 85 per cent of exports from India have been covered under one or the
other system of quality control. A large number of engineering items have been covered
under compulsory pre-shipment inspection scheme. However, items like diesel engines,
bicycles, small tools and hand tools, automobile spares, power driven pumps, sewing
machines and electric fans known as panel items- are covered under a system of in-
process quality control. In the case of these items, only manufacturing units exercising
adequate in-process quality control and allowed to export, and the adequacy of otherwise
is adjudged by export panels consisting of representatives of the Export Inspection
Council, Indian Standards Institution, Directorate General of Supples and Disposals,
State Departments of Industries and representatives from the trade and industry in large
as well as small scale sectors.

Similar arrangements for pre-shipment inspection, grading and marking of

agricultural goods and mill-made cotton textiles and yarn for export have been made
under the Agricultural Produce (Grading & Marking) Act, 1925 and the Textiles
Committee Act, 1996 respectively. Under the legislation, it is obligatory for the exporter
to fulfill the conditions relating to pre-shipment inspection of export goods. Procedure
and the details of pre-shipment inspection very according to the nature of export
commodity, the basic procedure is outlined below:
As soon as the goods are ready, the exporter should make out an application* in
the prescribed from giving details of the shipment to the inspection agency. Along with
the application he should furnish the following documents.**
(i) Commercial invoice giving evidence of the F.O.B value of export
consignment.
(ii) A crossed chaque/demand draft/I.P.O/ for the amount of inspection fee.
 (iii) A copy of the export contract/order giving details of importers’
specifications and /or a sample approved by the importer.

The inspection agency will depute an Inspector to conduct the pre- shipment inspections
at the exporter’s factory or were house. After the inspection is complete, and the
consignment is passed, a certificate of inspection will be issued to the exporter. This
certificate has to be presented by the exporter to the Export Department of the Custom
House at the time of seeking customs clearance of export cargo.

Since independence, there has been a conscious effort to improve the quality of
our agriculture and industrial production in the country. This has, however, now assumed
greater importance because of:
(i) adverse balance of payments position; and
(ii) Inadequate foreign aid.

Moreover, we should not expect our customers abroad to buy from us goods
which are of substandard quality and are relatively expensive. We should undertake to
orient our production pattern so as to be able to supply goods which may exactly met the
requirements of foreign buyers. It is not only the quality of the products that is important
but the way they are packed. Packaging is of paramount importance in consumer goods
items. Packaging and display, together with reliability of quality and continuity of supply,
determine to a large extent the continued acceptability of the Indian products abroad.

Export (Quality Control and Inspection) Act, 1963

To ensure a high quality of Indian goods, the government enacted a legislation
known as the Export (Quality Control and Inspection) Act. 1963. Under this Act, the
Government of India has been powers to:
(i) notify commodities which shall be subject to quality control or inspection or
both prior to export;
(ii) specify the type of quality control or inspection which will be applied to the
notified commodity;
(iii) establish, adopt or recognise one or more standard specifications for a notified
commodity; and
(iv) Prohibit the export, in the course of international trade, of a notified
commodity unless it is accompanied by a certificate that it satisfies the
conditions relating to quality control or inspection or that it has affixed or
applied to it a mark or seal recognised by the government indicating that it
conforms to the standard specification applicable to it.

EXPORT INSPECTION COUNCIL

The Export Inspection Council Of India was set up by the Government of India
under Section 3 of the Export (Quality Control and Inspection) Act, 1963, to provide for
the sound development of export trade through quality control and pre-shipment
inspection. The Council is an apex body for controlling the activities of the quality
control and pre-shipment inspection of all the commodities meant for export. The main
functions of the Council as assigned in the Act are (i) to advise the Central Government
regarding measures for enforcing quality control and inspection in respect of
commodities intended for export and to draw programme therefore; (ii) to arrange pre-
shipment inspection of notified commodities for export; and (iii) to perform such other
activities as may be assigned under the Act for matters connected therein for quality
control and inspection.
In order to make the Act more effective, keeping in view of the experience
gained, a comprehensive amendment was enacted by the Parliament through the Export
(Quality Control and Inspection) Amendment Act,1984 which came into force on
2.7.1984. The amended Act Interalia provides for power to search and seizure of
commodities, initiate adjudication proceeding against the erring manufactures/ exporters,
cancellations/ with holding of the certificate of inspection already issued by the
Inspection Agencies etc.
The EIC is to advise the Indian Government on matters relating to pre-shipment
inspection and quality control measures for export items. Considerable progress has been
made by the EIC in:
(a) defining the technical specifications for various products;
(b) providing testing /survey facilities; and
(c) Working out appropriate procedures.
EIC is a statutory body. Eminent technologists and representatives of industry and
trade, government departments and technical organisations are represented on it. As a
result, the specialised knowledge, experience and technical knowledge of the various
agencies in the country in the field of grading, standardisation and inspection have been
pooled together under the overall coordinating role of the EIC to enable it to carry out its
pre-shipment inspection programme in the most scientific manner. The secretarial of the
Council is located in Calcutta, with regional offices at Bombay, Madras, Cochin and
Delhi. In view of the existing inadequate testing facilities, it has been decided to set up
“laboratory-cum test houses’ at important trade and industrial centres in India, Moreover,
a number of existing agencies have been recoginsed for carrying out pre-shipment
inspection
In working out procedural details, the representative of industry and trade are
consulted, and where the existing trade practices so require, the scheme is introduced
initially on a voluntary basis and thereafter made compulsory. Process quality control in
the light engineering industry has been made obligatory on the part of the manufactures.
The secretariat of the EIC at Calcutta and its regional offices are manned with
experienced technical officers and staff, who deal with all aspects- both technical and
organisational- of quality control and pre-shipment inspection of exportable commodities.

QUALTIY STANDARDS FOR EXPORTS

In almost all the products, for which the pre-shipment inspection scheme has been
introduced, great care has been taken to accept the buyer’s requirements, wherever
known, as the basis of inspection. In many cases, where the buyer’s requirements are
known through-an approved sample of, for example, footwear or handicrafts, inspection
is carried out on the basis of the approved sample. However, for items involving safety,
such as cables and conductors, only the national standards, either Indian or those of the
importing country, have been adopted. In the case of commodities involving health
hazard, such as fish and fishery products, statutory laws as applicable in the importing
country for these products, are adheard to. This particular approach has been found to be
extremely practical and has helped the exporters to maintain the quality of their products.
For adopting or establishing technical specifications, detailed discussions are held with
the trade and industry and other organisations, such as the Indian Standards Institution
and the Directorate of Marketing and Inspection. In certain cases, minimum
specifications are laid down for a specific purpose only, as for example, n the case of de-
oiled rice bran, fumigation has been made compulsory for pre-shipment inspection.

The procedural details of the pre-shipment inspection schemes, which have been
introduced, have been worked in close collaboration and in consultation with the
representative of trade and industry. While preparing these detailed procedures, the
existing trade practices are taken into consideration, and the relevant Government
departments, including the customs authorities, are consulted, The general procedures for
inspection are thereafter notified in the form of inspection rules under the Export (Quality
Control and Inspection) Act for comments form the public. These notifications,
containing the proposals for pre-shipment inspection schemes, are also circulated among
important foreign buyers through the Indian Embassies/Trade Missions to obtain their
comments. Officers of the Export Inspection Council discuss the details of the schemes
with the representatives of trade and industry in the light of the comments they receive. In
many cases, where the existing trade practices so require, the scheme in the first instance
is introduced on a voluntary basis for a period of about 3 to 6 months; and only thereafter
it is made compulsory. All the pre-shipment inspection schemes are periodically
reviewed to keep abreast of technological developments and to ensure continuous
improvement in quality.
Appellate penels have been set up for each commodity or group of commodities which
have been brought under the compulsory pre-shipment inspection scheme so that any
person. Who is aggrieved by the refusal of the inspection organisation to give a certificate
of export-worthiness for his products, can appeal to the panel and get his grievance
redressed.
At present, the Export Council of India, the Indian Standards Institution, the
Indian Statistical Institute, Calcutta, the National Productivity Council, the Indian Society
of Quality Control and the Indian Institute of Foreign Trade are, by and large, responsible
for generating an awareness of the problem of quality control. These organisations hold
seminars, etc., and are, by and large, responsible for improvements in quality and for the
formulation and implementation of standards.
Certain legislative measures, which have helped in the production of quality
goods, include the Prevention of Food Adulteration Act, the Drugs Act, and the Fruit
Products Control Order promulgated under the Essential Commodities Act. Though these
Acts do not have a direct bearing on exports, they do help in promoting quality
consciousness among Indian manufactures.
The Acts which are directly concerned with exports are the Export (Quality
Control and Inspection) Act, 1963, the Textile Committee Act, the Certification of Goods
under ISI Certification Marks Act and the Agriculture Produce (Grading and Marketing).
Act. Since the enforcement of the export (Quality Control and Inspection) Act, 1963
definite improvements have taken place in the field of compulsory quality control and
pre-shipment inspection. Within a period of 29 years of its coming into being, the Export
Inspection Council has, completed the various tasks assigned to it.

EXPORTWORTHY CERTIFICATES

After carrying out the inspection, and if the consignment is found to conform to
the prescribed specification, each package in the consignment is sealed by the inspecting
officers. There types of seals are used, depending upon the mode of packing. For wooden
packages, for which iron hoops are used, sealing is done with decorative codes sigmoid
seals, For cardboard packages, paper stickers are used, and for gunny packing, lead seals
are employed. For those items which do not involve any packing such as cast iron soil
pipes, etc. each pipe is marked in paint with a rubber stamp.

For each consignment declared export worthy, a certificate of inspection is issued

by the inspection agency, in which the details of the consignment are incorporated. The
original copy of the certificate is valid for the use of the customs authorities, who ensure
that only the consignment. Whose details are given on the certificate is permitted or
shipment. Those notified commodities, the packages of which bear a recongnised
certification mark indicating conformity to notified standards, need not be accompanied
by a certificate of inspection.

FEE FOR INSPECTION

The expenses incurred on carrying out pre-shipment inspection are realised from
the exporters by the levy of inspection fees. In working out the charges for inspection, it
is endeavoured to prescribe the fees in such a manner that the scheme is self-supporting
as far as possible and, at the same time, the competitiveness of the products is not
affected in the international market. The initial non-recurring expenditure, such as the
expenditure incurred on the establishment of an inspection office and laboratory facilities
for running a new scheme, is met by the Government of India. Generally speaking, the
inspection fee varies from 0.1 per cent to 0.5 per cent of the FOB value, depending upon
the nature of the inspection work involved and, the testing to be carried out.

Commodities Covered under the Quality Control and Pre-shipment Inspection

The Export (Quality Control and Inspection) Act empowers the Government to
notify the commodities under the purview of compulsory quality control and pre-
shipment inspection. The notified commodities cannot be exported unless it is
accompanied by a certificate of export worthiness from the Inspection Agencies
recognised under the Act.
For the purpose of making positive impact on the quality of the exportable goods
and thereby generating the sense of confidence of the overseas market, more and more
commodities are being brought under the purview of compulsory quality control and pre-
shipment inspection. As many as 1055 items of exportable commodities under various
product groups such as engineering products, chemicals and allied products, coir and coir
products, food and agricultural products, mica, jute and jute products, footwear and
footwear and footwear components etc. , have been brought under the purview of
compulsory quality control and pre-shipment inspection schemes.
Export Inspection Agencies
In addition to the main officers of Export Inspection Agencies at Bombay,
Caluctta, Cochin, Delhi and Madras, these agencies have a network of 62 sub-officers
located at important manufacturing /processing centres, ports and export points. These
agencies have well equipped laboratories at all important centres for inspection and
testing of the products offered by exporters/ manufactures for inspection for inspection.
The Export Inspection Agencies assure the quality of the products covered under the
compulsory quality control and pre-shipment inspection scheme by conducting inspection
and testing of the products intended for export.
The export Inspection Agencies also undertake voluntary inspections of those
items which had not so far been brought under the ambit of the Act. These inspections are
normally done at the instance of the overseas buyers or the Indian exporters.
In addition of these five Statutory Agencies, the government have recognised 39
private Inspection Agencies and 10 Government agencies to supplement the work of
fumigation and quality control certification for certain specified commodities under the
Act. The government is empowered to withdraw recognition from any agency if it is
deemed to be necessary in the public interest.

Systems of Inspection
The following three inspection systems are in operation at present for the purpose
of ensuring quality of the product meant for exports.
(i) Consignment inspection.
(ii) In process Quality Control (IPQC)
(iii) Self Certification.

(i) Consignmentwise Inspection: Under the first system, each consignment is

subject to inspection and testing by the inspection agency on the basis of
statistical sampling plan.
(ii) In-Process Quality Control (IPQC): Under the second system, the quality
is built into the products by the manufacturing units themselves by
exercising raw material and bought out component control and packaging
control. The certification of inspection are issued by the inspection agency
on the basis of adequacy of the above controls and after spot checks of
consignment by the Agency where felt necessary. While the system of
approving units under IPQC has been simplified, the export inspection
agencies are also rendering necessary technical assistance to more and
more units so s to qualify them under IPQC System.
(iii) Self Certification: Under self-certification system, the manufacturing units
fulfilling the stringent norms prescribed for product quality, design and
development, raw materials and bought out components, quality control
laboratory, process control, meteorological control, independent quality
audit, packaging, aftersales service, house keeping and maintenance are
allowed to issue certificates of inspection themselves.
 To encourage more units to adopt IPQC system and self-certification scheme, the
units are now approved for a period of three years for non-food items and for two years in
respect of food items as against earlier practice of one year.

The units approved under the IPQC system and Self-Certification Scheme are
inspected periodically.

Pilot Test House

A thrust has been made by shifting the regulatory function of the Exports
Inspection Agency to quality development activities. Keeping this in background, the
Council has been entrusted with a project of providing technical assistance to the cross
section of the various industries for upgradation of quality of the product to compete
successfully in the International Market. For this propose a Pilot Test House has been set
up in Bombay with necessary infrastructural facilities of testing the product to the
requirement of the international standards.
To start with, the Pilot Test House should be in a position to meet the needs of the
engineering products already brought under the purview of compulsory quality control,
and pre-shipment inspection. The Pilot Test House supposed to have 17 laboratories
condensed into 13 sections for carrying out testing of the engineering products. The scope
of testing safety and health hazard items like domestic electric appliances, switch gears,
etc, has already been taken care of in the proposed laboratories. The Test House has three
major sectional laboratories namely (i) chemical laboratory, (ii) electric laboratory, and
(iii) mechanical laboratory.

Training Facilities
In order to achieve the overall objectives of the Export Development through
quality control and inspection, the Export Inspection Council has set up a full-fledged
training centre at Madras where training is imparted to the inspecting officers and the
officers in the middle management. Through the curriculum of the training, the officers
of the organisation are given training on the methodology and techniques of quality
assurance including the latest techniques in standardistion, inspection and quality control
prevalent in other countries. A part form training of officers of the organisation, the
technical personnel involved in the production and quality control department in the trade
at various levels are also given adequate training for maintenance of quality and periodic
inspection of the product manufactured, maintain product quality or to utilise such
information towards improvement of the quality of the product. The training centre at
Madres has been approved by the Food and Agriculture Organisation (FAO) for food
control training network in Asia. The FAO has agreed to finance to the tune of US $ 3.25
lakhs through UNDP assistance. FAO has also sanctioned a project at an estimated cost
of US $ 1.34 lakhs for strengthening the training programme in quality control of food
products in India. The project envisages the FAO would train master trainers in India
who in turn will train supervisors, technologists and workers engaged in the field of food
and agriculture products. The various international bodies like united nations, Industrial
Development organisation, Food and Agricultural Organisation have deputed officers
from different countries for training in the specialised field of quality control and
inspection in different agricultural commodities in India.
Procedures for Handling Complaints

Apart form enforcing compulsory pre-shipment inspection and quality control,

some procedures have also been evolved to assess and evaluate complaints on quality
received from buyers, by the regional standing committees at Bombay, Caluctta, Cochin,
Madras and Delhi. Complaints received on quality are investigated, evaluated and used as
a feed back system to remove the loopholes in the system of inspection and to improve
the quality of the products.

Voluntary Inspection

In addition to carrying out compulsory quality control and pre-shipment

inspection of commodities notified by the government under the Export (Quality Control)
Inspection Act, 1963, the Export Inspection Council undertakes voluntary pre-shipment
inspection at the specific requests received of foreign buyers or Indian exporters. Such
inspection is carried out on the basis of the specifications mutually agreed to between the
buyer and the seller.

Latest Position of Quality Control as Per the New Exim Policy Announced on 31st March
1992
The Central government has launched in association with trade and industry, a
major nation-wide campaign on quality awareness and is taking steps to bring Indian
products to world standards.
Government though introduced a nation – wide programme on quality awareness
in order to promote the concept of total quality management. However the response form
trade and industry is not that encouraging on this score, so far government of India
propose to encourage quality awareness programmes and assist state governments in
kindling similar programmes in their respective states, particularly for the small scale and
handicraft sectors.
The Central government have introduced a scheme to recognise and suitably
reward manufacturers who have acquired the ISO 9000 (Series) or BIS 14000 (Series) or
any other internationally recognised equivalent certification of quality. Such
manufactures are eligible for grant of special import licences.
The Central government will assist in the modernisation and upgradation of test
houses and laboratories in order to bring them at per with international standards so that
certification by such test houses and laboratories is recognised within the country and
abroad.
It may however, mentioned that quality control rigidities have been relased
considerably as far as it goes to the established large scale units; however, rigid
inspection is still there for the products of small scale units. Logically, they have to be
quality wise more competitive if they wish to gain a foothold in international markets.
 Export Assistance

In their efforts to diversity the export trade, manufactures are assisted

by import licensing to meet the requirements of imported raw materials for

production, the allocation of indigenous raw materials, fiscal rebates, railway

priorities and freight concessions, credit facilities, and so on.

Various Recent Assistance Programmes Announced by the Central

Government in July/August 1991 and in the Export Policy 1992-97 are –

1. The new policy eliminates licensing, quantitative restrictions and other

regulating discretionary controls. All goods may now be freely

imported and exported except for two small negative lists.

2. The number of canalized goods has been drastically reduced and

canalization is confined to certain petroleum products, fertilizers,

edible oils, cereals and a few other items.

3. The scope of the duty exception scheme has been enlarged by

introducing value based advanced licences besides the quantity based

advance licences. This will give greater flexibility to the exporter to

import and export goods within the overall value limits and without any

quantitative restrictions except in the case of sensitive goods.

4. Export house, trading houses and star trading houses and public sector

undertakings are eligible for the facility of self certification under the

Advance License Scheme against legal undertakings without any

monetary limits.
5. The Export Promotion Capital Goods (EPCG) Scheme has been

liberalized and two windows are now available for import of capital

goods at concessional rates of customs duty at 25% or 15% with

corresponding export obligations. Both new and second hand capital

goods could be imported under the Scheme. Domestic manufacturers

of capital goods who may require to import components may also avail

themselves of the EPCD Scheme at the concessional rate of customs

duty at 15% of CIF value. All licences under duty exemption scheme

are to be made transferable.

6. Export Oriented Units (EOUs) and units in the Export Processing Zones

(EPZs) have been given greater autonomy and flexibility. They are

allowed to install not only own machinery but also machinery taken on

lease. They could also export their production through export houses,

trading houses or star trading houses.

7. The Registration-cum-Membership Certificate (RCMC) issued by Export

Promotion Councils (EFCs) will be an essential requirement for any

importer/exporter to avail of the benefits or concessions or to apply for

any license.

8. Certain categories of exports and exporters will be eligible to receive

special import licences. These includes deemed exports, export

houses, trading houses and star trading houses and manufactures who

acquire ISO 9000 (series) or BIS 14,000 (series) certification of quality.

9. The export procedure and documentation have been simplifies and are

now easy to administer and save considerable time of the exporters.

Only one application form each has been prescribed for exports and
 imports, as also for legal undertakings and bank guarantees as against

several set of application forms earlier. New export documentation

system would save 50% time and cost on documentation. Two master

documents in place of 25 earlier to be submitted to various agencies

earlier is an important feature of the new documentation system.

10. As per the new five year export import policy, no drawback is

admissible on the product exported under DEEC. Therefore, the

existing provision of providing the reduced rates of drawback for

exporters availing of the duty exemption schemes, have been

discontinued.

On July 1, 1992 the Government of India announced the duty drawback

schedule in which it has approved 161 items to boost exports and fixed

specific rates for seven new items. The new duty drawback rates

continue the existing rates for 127 items including drugs, leather

products, sports goods and electronic items. Upward revision of duty

drawback rates is mainly attributed to the increase in the international

prices for a number of imported inputs, partial convertibility of the

rupee and general increase in prices during the past one year.

The items on which drawback duty stands withdrawn include cotton

gloves, variable PVC gang condenser, spectacle frames made of

cellulose acetate sheets, ceramic cartridges, ceramic stylus, refills for

vacuum flask with plastic outer cover, ethamutor tablets 400 mg. in

addition there are some items for which the existing drawback rates

have been decreased.

11. Duty exemption schemes, duty drawback schemes and exemption

from terminal excise duty have been extended to deemed exports.

12. Import curbs on exporters have been relaxed on August 7, 1991.

Restriction of 200% margin money for getting letter of credit for OGL

(open general license) imports has been totally relaxed in specified

thrust areas identified by the Commerce Ministry (Government of

India).

13. Credit limits available to the export sector and banks have been

substantially increased.

14. The restriction on import of capital goods has been removed now.

15. If imports covered by suppliers credit accompanied arrangement, there

will be expeditious clearance.

16. To meet the import requirement particularly for raw material the Exim

Bank has been allowed to given medium-term revolving line of credit.

17. The new policy has scrapped the instrument of Exim Script introduced

in August 1991 in favour of the partial convertibility of the rupee (PCR)

in 1992 as a means for increasing export earnings. A currency is

convertible when it can be exchanged against any other currency. In

the case of Indian rupee, it can be exchanged only against US dollar,

and that too through the banks. This partial convertibility has led to

discrimination. Earlier atleast all exporters get the same amount for

the dollar. Now on some days dollar rules higher than on other days.

The new policy allows the import of gold by Indians after a six months

stay abroad. Henceforth, as per latest “Liberalised Exchange Rate

Management System” (LERMS) there would be two exchange rates for

 foreign currency – the official rate fixed by the RBO at which 40% of

foreign exchange inflows would have to be converted and a ‘market

rate’, worked out in each transaction as the major foreign exchange

banks traded with each other or bought the remaining of 60% of

exchange inflows. The market rates being some 13% above the official

rate, and well below the 15% at which the RBO is expected to interview

by making purchases in the market. The partial convertibility of the

rupee has particularly affected those exporters who had to import a

substantial part of their material requirements.

It is expected that over a period of time Indian rupee will stabilize.

However, according to one estimate exporting companies with an

import requirement of over 10% could experience their margins

decreasing and for high tech exporting companies with an import

content 50%, the margines would fall by over 5%.

18. The facility of opening dollar accounts in India, hitherto granted to

exporters of gem and jewellery and Maruti vehicles, has been

extended to other exporters too. The account holders will also be

eligible for 80 HHC, for which a provision has already been made in the

Finance Bill. Dollar remittances credited in the account would be

utilized to repay the hard currency loan obtained by the exporter on

his own scheme for importing inputs and the surplus would be diverted

to RBI’s central pool.

19. The Commerce Ministry has decided to decentralize clearances of

advance licences, export oriented unit (EOUs) and export processing

 zones (EPZs) and the function is now being handed over to the

commercial banks.

20. Another irritant of 15% tax as foreign travel stands withdrawn in May

1992 and the release of foreign exchange for travel has been made

easier and more liberal. For those traveling abroad, the ”blanket

permit” continues. The allowances of upto $300 per day during foreign

travel is sanctioned.

21. The government also released computer-compatible advance licences

(which allow duty free imports required for exports) on September 4,

1991. These licences will be available within 15 days of submission of

application. advance licences would be issued within 15 days in cases

where input-output norms had been fixed and 45 days in other cases.

Thus advance licensing has been strengthened.

22. Importers of capital goods who have a supplier’s credit of one year or

more and a buy back arrangement will henceforth get speedy

clearances.

23. The ceiling limit on OGL has been raised from Rs. 2.5 crore to Rs. 5

crore. It has been decided to extend the limit to 20% of last three

years performance subject to a maximum of Rs, 5 crore.

24. The scheme for grant of additional licences to export houses/ trading

houses/ star trading houses has been abolished and in lieu of such

additional licences these houses will be eligible for REP licences at

lower rates, 5% instead of 10% for export houses/ trading houses and

10% instead of 15% for start trading houses/ The advance licensing

route will remain open for exporters who wish to go through this route.
 The REP rate for advance license exports is being increased from 10%

of NEF to 20% of NFE.

25. The level of inventory holdings of imported raw materials is restricted

to the levels of three months.

26. Small scale industries and producers of life-saving drugs and

equipment will continue to be eligible for supplement licences for

Appendix 3 items.

27. Private parties have been allowed to establish warehouses within

EOU/EPZ for stocking and sale of duty-free raw materials, components,

consumable and spares of EOU/EPZs units.

28. The recognised export houses whose turnover has crossed a certain

limit have been allowed to open accounts in select foreign banks and

avail themselves to finance their imports. Implicit in this innovation is a

daring start to the process of making the rupee a tradeable currency.

29. Marine products, certain agricultural goods, electronic and high

technology engineering equipment have been duly encouraged for

exports. This should lead to an increase in production and upgradiation

of technology. Sixteen export and 20 import items have been

decentralised. Several items from the monopoly of public trading

houses have been taken out. This has been done with a view to impart

competitive spirit. Two entries now thrown open to all exports are

interesting. One relates to railway passenger coaches and locomotives

and the other is coke and coal.

30 Import of capital goods has been made easy. If the equipment is

bought out of foreign equity, there is no ceiling of the amount involved.

 An entrepreneur can bring in plant and equipment which are readily

available in India.

31 Export-import controls have been made easy. If the equipment is

bought out of foreign equity, there is no ceiling of the amount involved.

An entrepreneur can bring in plant and equipment which are readily

available in India.

32. Import of 3 items banned, 68 items restricted and 8 items canalised.

The pruned negative list of exports banned 7 items, restricted 62 items

and canalised 10 items, permitted 46 items’ export with minimum

regulations.

33. The deemed exports have been accorded favourable treatment. Except

for some petroleum products, edible oils, fertilizers and cereals etc., all

others items have now been decanalised. Benefits of duty exemption

scheme, duty drawback scheme and exemption from terminal excise

duty have been extended to deemed exports.

34. The scope of duty exemption schemes has been enlarged by

introducing value-based advance licensing besides. The quantity-based

advance license. This will give greater flexibility to the exporter to

export and import goods.

35. The multiplicity of controlling agencies have been considerably

reduced.

36. Pre-shipment inspection scheme has been abolished for export houses

and large scale units.

37. The office of the CCI & E is to be redesignated as Directorate General

of International Trade. The functions of CCI & E are being reoriented.

 The role of CCI & E will be of promoter of exports instead of controller

of imports and exports. The Borad of trade has also been

reconstituted.

38. Now an exporter can borrow FOREX designated export credit at 6.5%

and medium term

deferred credit at 7.8%. Export credit in Indian rupees carries interest

as high as 15%.

Exporters should take advantage of the low rate of interest.

39. Fifteen per cent of receipts, exporters are permitted to retain in a

foreign currency with a bank in India under the new liberalised exchange

rate management system (LERMS).

The retention upto 15% of the receipts have to be out of the stipulated

60% convertible foreign exchange under free market rates. Funds in

such foreign currency accounts could be utilised for all purposes,

including remittance of commissions.

40. More then 90% of the trade regulations have been removed and the

remaining

regulations would be gradually done away with.

41. The RBI has modified the export credit refinance formula to provide

added incentives for

extending export credit. The banks would now be provided export

credit refinance to the extent of 60% or the increase in outstanding

export credit over the monthly average level of 1988-89 upto the

monthly average level of 1989-90 plus 125% (as against 100%

 hitherto) of the increase over the monthly average level of outstanding

export credit in 1989-90.

This modified two tier formula has been implemented in two

stages. The second tier of export credit refinance was raised from

100% to 110% form November 1991 and from 110% to 125% from

December 28, 1991. This has been done to bring about increase in

exports. The increase in export credit interest rates together with the

liberalisation of the export credit refinance formula are major

incentives to banks to provide export credit.

42 The EXIM Bank’s Power for clearance of proposals for project exports

have been

enhanced from Rs. 20 crore to Rs. 30 crores.

43. As per the latest RBI directive banks may grant loans and overdrafts to

persons, firms

and companies, including banks outside India after fulfilling the

following conditions: There should not be any direct or indirect outgo

of foreign exchang; the loan should be fully secured by primary

security in the form of hypothecation/mortgage of asset by Indian

borrower; regulations relating to normal margin, interest rates etc. as

stipulated by the RBI from time to time should be complied with; the

guarantor should have assets in India, which are not less in value then

the amount of the guarantee.

Export Processing Zones (EPAs): The Government of India introduced

EPZs with an objective to increase production base of exportable

commodities and goods. There are six EPZs at KANDLA, Santacruz

(Bombay), Falta (west Bengal), Madras, Cochin and Noida (near new

oriented multiproduct industrial units. Santacruz (Bombay) EPZ is a

zone established for 100% EOUs manufacturing electronic equipments

and components.

Supplies can be obtained in these zones for further production

without payment of excise duty or import duty, importation is possible

without prior licensing. However, it is obligatory on the exporting units

to export 100% of their production.

All units in EPZs are eligible for a tax holiday for a period of 5

years. Tax holiday could be availed for any continuous block of 5 years

within 8 years of commencement of production. Besides foreign

investment is welcome and conditions for investment are more liberal

than in the domestic tariff area.

100% Export Oriented Units (EOUs)

This scheme was introduced on 31st December 1980 with the

objective of generating additional production capacity for exports. The

100% EOUs are required to undertake manufacture under bond and

export for a period of 10 years ordinarily and 5 years in the case of

products having high degree of technological change. Such units are

allowed import of machinery, components, spares, raw materials and

consumables free of duty. EOUs are expected to export their entire

production except.

(a) Rejects upto 5% or such percentages may be fixed by the

Board of approval. Rejects may be sold in the Domestic Tariff

Area (DTA), subject to payment of appropriate duties.

 (b) 25% of the production in value terms may be sold in the DTA

when the use of indigenous input is more then 30% in value

terms. When the use of such inputs is less than 30%, DTA

sale entitlement shall not exceed 15% in value terms. Unlike

EPZs, EOUs can be located any where in India, be of any size,

or even MRTP/FERA, a new factory, a new branch of an

existing factory or an expansion of an existing factory.

Benefits for supplies from the DTA

Supplies form the DTA to EOUs/EPZs untis will be regarded as

“Deemed Exports” and will be eligible for the following benefits.

(a) Refund of terminal excise duty, central sales tax and duty draw

back;

(b) Exemptions from payment of central excise duty on capital goods,

components and raw materials supplied under this paragraph;

(c) Discharge of export obligation, if any, on the supplier.

The benefits stated above shall be available provided to goods

supplied are manufactured in the country and the supplies are against

a letter of authority issued by the Development Commissioner.

Benefits for EPZ/EOU Units

(i) Concessional Rent: The units set up in the EPZs will be eligible

for concessional rent for lease of industrial plots and standard

design factory (SDF) buildings/sheds allotted for the first there

years at the following rates:

(ii) For Plots: The concession will be 75% for the first year, 50% for

the second year and 25% for third year if production had
 commenced in the first year or the second year. The concession

will not be available for the third year if production had not

commenced by the end of the second year.

(iii) For SDF buildings/sheds: The concession will be 50% for the first

year 40% for the second year if production had commenced in

the first year. The Concession will be 25% for the third year if

production had commenced in the first year. The concession will

not be available if production had not commenced by the end of

the first year;

(iv) Tax Holiday: EOUs and EPZ units will be exempted from

payment of corporate income tax for a block of five years in the

first eight years of operation;

(v) Clubbing of NFE: Net Foreign Exchange (NEF) earned by an

EOU/EPZ units can be clubbed with the NEF of its

parent/associate company in the DTA for the purpose of

according export house, trading house or star trading house

status for the latter;

(vi) IPRS: The International Price Reimbursement Scheme for supply

of iron and steel will be available to EOUs and EPZ units; and

(vii) 100% Foreign Equity: Foreign equity upto 100% is permissible in

the case of EOUs and EPZ units.

Inter-unit transfer

(viii) Transfer of manufactured goods may be permitted by the

Development Commissioner form one EPZ unit to another EPZ

 unit, one EPZ unit to a EOU, one EOU to an EPZ unit or form one

EOU to another EOU.

(ix) Goods imported by an EOU/EPZ unit may be transferred or given

on loan to another EOU/EPZ unit with the permission of the

Development Commissioner.

Subcontracting

(x) The EOU/EPZ units may be permitted to sub-contract part of

their production for job work to units in the DTA on a case to

case basis Requests in this regard will be considered by the

concerned Customs authorities on the basis of factors such as

feasibility of bonding, fixation of input and output norms, and

furnishing of undertakings/bonds by the concerned units.

Sale of Imported Materials

(xi) In case an EOU/EPZ unit is unable, for valid reasons, to utilise

the imported goods, it may re-export them with the permission

of the Development Commissioner, subject to clearance from

Customers with reference to valuation etc. Such goods may also

be transferred to an Actual User in the DTA with the permission

of the Development Commissioner on payment of applicable

duties.

(xii) Imported machinery/ capital goods that have become obsolete

may be disposed of, subject to payment of customs duties on

the depreciated value thereof.

Disposal of scrap
 (xiii) The Development Commissioner may, subject to guidelines laid

down by the BOA in this behalf, permit sale in the DTA of scrap/

waste/ remnants arising out of production process on payment

of applicable duties and taxes. Percentage of such scrap/waste/

remnants shall be fixed by the Board keeping in view the norms

specified by a public Notice issued in this behalf by the Chief

Controller of Imports and Exports.

Private bonded warehouses

(xiv) Private bonded warehouses may be permitted to be set up in

EPZs for stock and sale of duty-free raw materials, components

etc., to EOUs and EPZ untis subject to the following conditions:

(a) The private bonded warehouse shall be located within the

EPZ;

(b) Imports for such private bonded warehouses shall be made

only against specific licences. No license shall be given to

import items which are not required by the consuming untis;

and

(c) The items imported by the private bonded warehouses shall

not be permitted to be sold in the DTA.

Period of Bonding

(xv) The bonding period for units under the EOU Scheme shall be 10

years. The period may be reduced to 5 years by the BOA in case

of products liable to rapid technological change. On completion

of the bonding period, it shall be open to the unit to continue

under the scheme or opt out of the scheme. Such debonding

 shall, however, be subject to the industrial policy in force at the

time the option is exercised.

(xvi) On the Satisfaction of the BOA, EOU/EPZ units may be depended

on their inability to achieve export obligation, value addition or

other requirements. Such debonding shall be subject to such

penalty as may be imposed and levy of the following duties:

(a) Customers duty on capital goods at depreciated value but at

rates prevalent on the dates of import;

(b) Customers duty on unused raw materials and components on

the value on the dates of import and at rates in force on the

dates of clearance.

Conversion

(xvii) Existing DTA units may also apply for conversion into an EOU

but no concession in duties and taxes would be available under

the scheme for plant, machinary and equipment already

installed.

Value addition

“Value Addition” shall be expressed as a percentage and shall be

calculated according to the following formula:

A −B
VA = × 100,
Where
A

VA is Value Addition,

A is the FOB value realised by the EOU/EPZ unit; and

B is the sum total of the CIF value of all imported inputs the value of

all payments made in foreign exchange by way of commission, royalty,

 fees or any other charges, and the value of all indigenous inputs

purchased by the EOU/EPZ units. Inputs mean raw materials,

intermediates, Components, Consumables, parts and packing

materials.

Investment Policy for Non-Resident Indians and Overseas Corporate Bodies

Liberalised

The following are the highlights of the revised policy and procedure for

investment by Non-Resident Indians (NRIs) and Overseas Corporate Bodies

(OCBs):

1. NRIs and OCBs predominantly owned by them permitted to invest

upto 100 per cent foreign equity in high priority industries with full

benefits or repatriation of capital and income accrued.

2. Permission for NRIs and OCBs equity holding up to 100 per cent

granted in hotels, tourism-related industry, hospitals, diagnostics,

canters, shipping, export-oriented deep-sea fishing industry and oil

exploration services with full repatriation benefits.

3. Foreign equity covers the foreign exchange needs for import of

capital goods with the proviso that the plant and machinery to be

imported must be new and not second-hand.

4. The proposed NRI and OCB project must be located within 25 Km

form he periphery of the standard urban area limits of a city with a

population of a million.
 5. Existing scheme of 100 per cent NRI investment in 100 per cent

EOUs (export-oriented units) as also the scheme for revival of sick

units by NRIs to continue.

6. The revised procedures demands the NRI and OCB proposal to be a

composite one including detailed information on the capital goods to

be imported for the project.

7. No indigenous clearance required for import of capital goods which

are fully financed by NRIs out of their own resources abroad, provided

the items of import not covered under Appendix I, Part A of the Exim

Policy (1990-93).

Conclusion: As regards export incentives there is no beginning and no

end in this in this matter. Incentives granted at one point cases to be

incentives at another. A true incentive would be to make rupee fully

convertible. When this is done the debate on incentives/assistance will

weaken.

Lesson 16-
Physical Distribution Transportation,
Packaging and Marine Insurance for
Exports

Having examined the nature of international trade channels, we now turn to the
related function of physical distribution; i.e., the actual movement and storage of
products until they reach the final consumer. This chapter includes discussions of
transportation, packing and warehousing needed for international movement of goods.
This chapter also includes a description of marine insurance because of its close
relationship to the physical distribution function. Since the contents of this chapter are
drawn from complex and technical subjects. Our objective is to provide a sketch of the
area’s main concepts. Anyone inspired to conduct international commerce should at least
be aware of these major considerations.

PHYSICAL DISTRIBUTION DEFINED

Often physical distribution is seen merely as transpiration and the related area of
storage. Actually the physical distribution function includes a broader array of activities
needed to provide efficient movement of finished products and raw materials from the
factory to the final user. The National Council of Physical Distribution Management,
USA, a group devoted to the advancement and study of logistics, recognized the
important components when it defined physical distribution as:

“…… the broad range of activities concerned with the efficient movement of
finished products from the end of the production line to the consumer and in cases
includes the movements of raw materials from the source of supply to the beginning of
the production line. These activities include transportation, warehousing, materials,
handling, protective pack- aging, inventory control, plant and warehouse site selection,
order processing, market forecasting, and customer service.”

In this definition, physical distribution is viewed as an integrated system that

determines what goods are needed in specific locations, performs the transportation and
storage functions, processes orders, and maintains and effective information system.
Bowersox offers a simplified definition stressing the business activities involved to
satisfy customer needs for an assortment of goods. This is the definition we will use in
this chapter. “Physical distribution consists of those business activities con- cerned with
transporting finished inventory and/or raw material assortments that they arrive at the
designated place, when needed, and in usable condition.”

The growth and development of exporters an their need for worldwide logistical
support provide many opportunities for integrating the physical distribution function to
improve service levels and reduce costs. Functions that traditionally ware delegated to
freight forwarders and other third parties may be performed within the firm as it plans
logistical support for its affiliates. The firm’s marketers and distribution specialists can
work together to control distribution costs while still providing the level of customer
service required to compete in the world market. Computerized communication systems
facilitate document processing and enable the firm to maintain better control over the
physical distribution system.

The export manger has two problems in working with the distribution system in
an export market:
(a) Transportation for the movement of goods; and
(b) Marketing channels to be used to reach the foreign buyers.
 The price of the end product is heavily influenced by the way the physical product
moved. The transport costs constitute a big proportion of the total cost of the
merchandise. The cost of export distribution is greater then domestic distribution because
involvement of additional packing and creating are often necessary and the intermediaries
become necessary because the exporter does not have adequate export know-how. In
addition, insurance for transportation may be necessary to reduce the quantum of risk,
because increased profits can be generated directly either through reduced costs or
increased sales. Transportation costs are lowered when technological improvements are
made use of.
Any exporter can make a particular sale because the transportation system he uses
is speedy and reliable and because he can get this product to the foreign consumer when
and where it is wanted at comparatively reasonable cost.

Decision Areas of Physical Distribution

The exporter should take the decisions for physical distribution in the following
areas:

1. Size of the Consignment

(a) Minimum size of the pack;
(b) Quantities to be shipped;
(c) The type of the packing to the used;
(d) Markings to be used on the container.

2. Transportation
(a) The route of the shipment to be used;
(b) Mode of transportation to be used;
(c) Marine/air insurance.
3. Storage
(a) Assembling;
(b) Breaking bulk shipments into smaller sizes;
(c) Preparing products for re-shipment.
4. Plant Location
(a) Determining the number, size and geographic placement of the warehouse;
(b) Number of plants and their locations.

5. Materials Handing
Provisions for internal movement of products within the plant and warehouse
facilities.

6. Carrying Inventory
Proper level of inventory so that a balance is maintained between customer
service and inventory cost.
7. Order Processing and Documentation
(a) Procedures must be established to process orders;
(b) Correct documentation.

The physical distribution system of exports is two-phased, i.e, first, the products
must be moved both between nations and within overseas market. The extent to which
the export marketing manager must plan depends upon the terms of sales. The basic types
of mode of transportation available to exporter are:
(i) Shipping;
(ii) Air;
(iii) Rail;
(iv) Truck.

Shipping the most popular mode of exports. The importance of other types
depends on many other factors. The export marketing main must know the relative
advantages of all the modes of transportation available to him – particularly for the
markets in which he is doing business or in which he is interested in doing business. Air
transport offers the advantage of speed and dependability of delivery, insurances and
warehousing, etc. However, the total cost by air turns out to be considerably high.

Factors Influencing Distribution Cost

The rise of fall in distribution costs in influenced to a very large extent by the
following factors:
(i) Quality of customer service;
(ii) Quality of the mode of transport; and
(iii) Quality of purchasing.

The main factors which directly influence distribution costs include the following:

(i) The size of the consignment;

(ii) The location of port of shipment and port of entry;
(iii) Regularity of movement;
(iv) Speed of delivery and lead time;
(v) Nature of goods- perishable or not;
(vi) Stock-holding requirements;
(vii) Packaging requirements and dispatch facilities; and
(viii) Methods of handling.
Part I

TRANSPORTAION
The transportation industry is a complex of institution that includes not only the
carriers themselves (the ocean shipping companies, airlines, and truckers), but also the
supporting terminal operators, freight forwarders, customhouse brokers, ship brokers,
financial houses, insurance firms, and engineering and manufacturing concerns, There is
also an array of governmental agencies, that oversee the operations of the industry and
control the rates charged and services provided. Changes in any of these institutions or
their foreign counterparts have ramifications on the rest of the industry and affect the
service provided to the shipper of goods in international trade.

ELEMENTS OF THE TRANSPORTATION SYSTEM

Physical distribution managers have an array of alternative methods or modes of

transportation for the movement of goods across borders and within countries. Various
forms of sea, air, and land transportation may be available for use singly or in
combination. The manager’s choice is influenced by the specific product and market
characteristics. Large, bulky, low-unit-value items and basic commodities may not be
capable of economically using some forms, such as air transport, except for special
shipments. On the other hand, fresh flowers and perishable foods may require either fast
shipment or special storage facilities. High-value items such as jewellery may be shipped
by a variety of methods, but their margins permit movement by high cost rapid
transportation and at less risk of theft.

(1) Market Location

The market location affects the types of transportation that are available.
Contiguous markets frequently can be efficiently serviced by truck or rail as might be the
case for US manufactures shipping to Canada or Mexico, or for most European producers
selling to other continental companies or Indian companies might sell to Pakistan,
Bangladesh or Nepal. The location and size of the market and its physical facilities may
limits its access by ocean freight. Air transportation is increasingly making markets such
as Japan and Brezil quickly which are accessible for products that can economically
employ that mode.

In order to achieve efficient movement of goods at low cost, the manger of

physical distribution needs to evaluate the viable alternatives. This analysis involves
investigation of not only transportation rate structures, but also the effect of
transportation on the other distribution costs: warehousing, inventory, packing, and
communication. Frequently, trade-offs must be made among these various distribution
functions in order to obtain the lowest total cost for the system as a whole. Some of the
possible trade-offs within the physical distribution system itself will become apparent in
subsequent sections; however, the trade-offs also involve broader marketing
considerations. The performance of the distribution functions can affect a company’s
sales. Buyers of industrial goods require assurance that supplies, component parts, and
raw materials will be available to meet projected production schedules. Retailers also
need assurance that products will be available in saleable condition in time to conform
the scheduled promotions. For both retailers and industrial buyers, quick access to nearby
inventories may be important in planning their own inventory levels and assortments.

Choice Criteria
 Achievement of the firm’s physical distribution objectives requires knowledge of
all available alternatives. When selecting an appropriate mode of transportation and the
particular carrier to be used, managers evaluate the alternatives on several criteria in
addition to the interaction noted above. Commonly used criteria include consideration of
each method of transportation on the basis of speed, cost, dependability of performance,
and services.

(a) Speed: Rapid transportation may be obvious factors for perishable products,
but it is also significant for other products because of its effect on inventory. Rapid
transportation enables a firm to maintain a minimum inventory. Rapid transportation
enables a firm to maintain a minimum inventory in float, i.e., the movement process.
Since inventory carrying charges are a significant cost factor, the reduction of float
lowers the firm’s investment while still providing satisfactory service. Speed also tends to
lesson the losses due to spoilage and theft. Rapid delivery shortens the period for which
demand forecasts must be made. It makes possible rapid filling of customer orders,
thereby lowering the inventory that a buyer must carry.

(b) Cost: Unfortunately, the use of rapid transportation modes results in a high
transportation cost. The higher freight rates associated with rapid transportation lead to
high transportation costs per ton per kilometer. This high transportation cost may be
partially or wholly offset by savings in packing, inventory, or other costs. Air freight, for
example, does not require the packing needed to protect ocean freight and also will
reduce the time in transit. The rate structure for international movement is complex and
cost comparisons need to be made for specific shipments based on applicable rates for the
product and shipping and receiving points.

(c) Dependability: Dependability of delivery and safe carriage of goods can easily
be as important as cost and speed in the transportation decision. Of prime importance to
the buyer is the assurance that goods will be available when promised and in saleable or
usable condition. The buyer who can depend on delivery schedules can plan promotions
and production. Schedules to achieve maximum sales impact and coordination of
production and marketing. Dependability of transportation aids the seller in making
realistic delivery promises and aids the buyer by permitting close scheduling with
attendant inventory and warehouse savings.

(d) Services: Each of the transportation modes has its own unique characteristics.
In addition, each has developed a variety of service options to attract customers. Some
arrange for pickup and delivery, permit diversion of freight to a second market, allow
shipments to move, or provide other services to meet a customer’s requirements. A firm’s
foreign freight forwarder can aid shippers in the selection of the most advantageous
services.

MODERN DEVELOPMENTS IN TRANSPORTAION

International marketing managers must choose from a complex, often

bewildering, array of transportation methods for distributing their products between and
within countries. Not only are there a larger number of alternatives that may be available
at a given time, but the established patterns of transportation are continually being
challenged and adjusted by new technology, by changes in the infrastructure of the
countries, and by changing trade patterns to which the transportation agencies adapt.
Modern technology has produced the huge supertankers, lighter abroad ship (LASH)
vessels, and containerships; the wide-bellied jets for air freight service; and improved
trucking facilities for land travel. In addition, governments have improved roads and port
facilities as part of their economic development programmes. The institutional structure
of the transportation industry itself changed to adapt to these environmental changes and
the shifting economics of the industry.

Types of Transpirations.

(i) Sea Transpirations: The modern containership is a prime example of advances

in ocean shipping. The containership is specially designed to transport shipments in
relatively large boxes or containers. These containers permit the consolidation of items
into standard-sized units for efficient handling and storage abroad ship. Furthermore, the
container are designed for repeated use by several modes of transportation. The container
may be filled at the shipping point, carried by truck to the railway line, placed on a
railcar, and transported to the dock where it is loaded aboard ship, all without
intermediate loading or unloading.

Containership are efficient carriers of large amounts of merchandise and have

replaced smaller general cargo ships on many trade routes. They provide more efficient
handling and faster turnaround times in the ports so that a smaller number of them can
provide the same shipping capacity of the smaller vessels. This, in turn, has meant that
many shipping firms have been forced to replace their older ships to remain competitive.
Also some ports which ware formerly visited by the smaller ships are no longer able to
provide the volume needed for efficient operation of the large containerships, and the
routes have been adjusted so that the larger ports often serve new areas. The increasing
concentration of activity in these ports often serve new areas. The increasing
concentration of activity in these ports has been accompanied by improved rail and road
linkages between the ports and interior areas previously served by other ports. The
Scandinavian countries, for example, have found that only a few of their ports have been
able to support frequent and regular containership service.
The containerships also effect the documentation and customs procedures as well
as insurance risks and rate structures of the industry because the goods are consolidated
in large containers and not readily available for inspection of individual items. The
containers, in addition, have aided the development of intermodal transport system which
integrate the use of trucks, ships, and /or planes. Thus, the new technology has influenced
all segments of the industry.

Other developments in ocean freight which have provided more efficiency or

better service include the gigantic super tankers, the largest of which, the ultra large crude
carriers, are 400,000 deadweight tons or larger. Following the closing of the Suez Canal,
the petroleum industry began using larger tankers as a means of reducing transportation
costs. The efficiency of the newer ships led to the development of extremely large
carriers that ware several times the size of earlier ones. These ships required sophisticated
equipment and port facilities. They also exposed the oil industry to criticism by
environmentalist who feared the catastrophic effect of a gigantic oil spill in the event of a
wreck. The high fixed costs of operating these ships require that they be in rather
continuous usage. Slowdowns in the shipment of oil in 1975 and due to Iraq and allied
forces war in 1991 led to inactivity of these vessels at great cost to the owners.

New bulk carriers and roll on/roll off (Ro-Ro) vessels allow the shipper to
transport the entire trailer or other trucks and vehicles on their own wheels for easy
loading and unloading. Roll on/roll off vessels have also been used for special
transportation problems such as the carrying of helicopters from the United states to
Europe and the shipment of entire fivecar trains for Amtrak from France to the United
States. Lighter aboard ship vessels (LASH) are designed so that entire barge, and at the
foreign port, sent the barge to another river location removed from the port area- all of
this without multiple handling of the merchandise.The LASH vessels further aid in
loading the unloading at ports where the formation of the costs and ports requires
unloading by lighter equipment rather than through direct access to the piers and
wharves. Special vessels have been designed for the requirements of products such as
liquid natural gas, wine, and automobiles.
In 1980, several development impacted unfavorably on the international firm
using ocean shipping. The carriers cut speed on their vessels to combat rising fuel costs,
thereby extending delivery schedules for the shipper with higher inventories and
accompanying interest costs. Also, since the large ships are cost efficient only when full y
used, shippers could expect fewer sailings and calls at fewer ports.

(ii) Air Transportation: Although ocean freight accounts for the largest percentage
of the tonnage of goods moved in international trade to and form India, the air-carriers
have long provided a viable alternative for some producers; especially those shipping
products with a high value relative to their weight, that are perishable or otherwise could
profit form the great speed of aircraft. Because of the speed factor, air carriers have been
strong proponents of the total cost approach of physical distribution. Analyses of
company distribution systems have sometimes shown that the higher costs of air
transportation may be partially or totally off set by savings in packing, handling,
inventory, documentation, delivery, and related costs. Often, however, the decision to use
air transportation may reflect the service features of air carriage rather than costs. The
speed of delivery may, for example, enable the customer who purchases industrial
equipment to get into production at a much earlier time than when slower forms for
transportation are used, thereby producing income earlier.
The high-speed jet fleets of the Indian and foreign carriers have added to the
industry’s capacity. The nose-loading feature of the 747 makes possible the use of
efficient loading equipment and the loading of containers and oversized cargo that could
not previously be handled. The ability of the planes to carry containers may increase the
ability of the air carriers to compete in the intermodal system to further increase the value
to shippers, by providing door-to-door service at lower costs and greater security to the
merchandise.
 Innovations in the air cargo industry have not only included advanced airplane
technology, but also improved airport facilities. The carriers have also introduced more
efficient ground handing equipment, added more fights to the schedules, and have sought
to extend their services to a wider range of merchandise.

(iii) Land Transportation: While ocean and air transportation have provided some
of the more glamorous applications of technology, land transportation has also undergone
a transformation. New highways and the increased number of trucks available have
improved the service of land carriers in many countries so that they now carry an
increasing percentage of the inland freight volume. In Japan, for example, trucks carried
almost 89 percent of the tonnage of inland traffic in 1970 compared to only 75 per cent in
1960. Several reasons account for this growth in Japan: an increased demand for freight
service due to the growth of the economy, the strained capacity of the Japanese railways,
emphasis on rapid and punctual delivery, improved roads, and the development of the
Japanese automobile industry. Some of these reasons also figure in the development of
land transpiration in India and elsewhere.

In Europe, even through faced with competition from the railways and inland
shipping alternatives, trucking has been significant in the fast movement of non-bulky
goods. The European trucking industry has provided shippers with flexibility that is often
found when an industry is characterized by a large number of small firms. In Holland, for
example, 58 per cent of the “for hire” firms own two or less vehicles. About 3.4 per cent
of the companies own 15 or more vehicles and account for 28 per cent of all trucks. The
picture may be changing, however, as the European trucking industry is now
consolidating and forming larger companies to improve efficiency.

Among the problems faced by European truckers are the varying regulations on
permitted weight and length of units among the countries, especially since it is
economical to use trucks for cross-border hauling within the EEC. A related problem has
been the inspections required to move goods across several country borders. A truck and
its contents might be subject to several inspection and to the payment of duties or
subjected to considerable paper work To cope with this, the TIR (Transport Internationals
Routiers) Convention developed a system whereby vehicles that have met certain
conditions and achieved prior approval can carry merchandise across borders without
examination at each. This TIR carnet procedure has greatly simplified the movement of
goods by truck.

Intermodal Development: Various types of transportation have been combined to

provide either low costs or improved transit time. These combinations have sometimes
reslueted in a different routing for trade between widely separated points. Among these
have been both sea/land combinations and air/land combinations. The so- called land
bridges provide an interesting example of such intermodal transportation.

Container shipments from Japan to Europe may leave Japan by sea, arrive at a
U.S. West- coast Port, and be placed abroad a container unit train which carriers the
goods to the East of cost port where they are again loaded aboard a ship for Europe.
Similarly, Japan-bound shipments form Europe may be landed at either the East or Gulf
coast for movement to Japan. Use of the landbridge may result in a savings of six or
seven days in travel time between Europe and Japan where it is said to undercut the all-
water route rates by 10 to 50 per cent. In 1980, Britain’s Overseas Container Ltd.
estimated that the TSR land bridge carried almost 30 per cent of the traffic bound east to
Japan; up from 4.4 per cent in 1973.

SHIPPING COMPANIES
Shipment of general cargo move on the vessels of shipping companies. Shipments
of bulk cargo, both dry and liquid, more often move on chartered ships. In the first case, a
shipper usually requires the use of only a portion of the hold of a vessel, which in the
second case, the shipper usually engages the entire vessel and expects to fill it with
shipment

Shipping companies often are divided between liner companies and tramps. The
main difference between the two is that the liner company advertises a scheduled service
between ports. Tramp ships operate on characters wherever they can get cargo. Often the
ships of the liner companies are newer and operate through an extensive network of
agents. They generally serve a large number of shippers than the tramp vessel and carry a
wider range of higher value goods. Shipping companies are common cariers, while the
charted vessels used by shippers are private carriers. However, shipping companies also
charter ships and operate them in common carrier service.
The United Nations Conference on Trade and Development (UNCTAD) has
proposed phasing out the flags of convenience, but this move has been resisted by the
industrialized countries. Under a liner code adopted by UNCTED in 1947, a country is
entitled to demand that 40 per cent of its exports that go by liner by carried in its own
ships, and it may reserve up to 40 per cent additionally for vessels of the importing
country. The two UNCTAD proposals attempt to secure a larger portion of the trade for
lesser developed country shipping.

INTERNATIONAL FREIGHT FORWARDERS

The international freight forwarder is in business to facilitate export and import
shipments. The forwarder consolidates small shipment into larger ones and arranges for
transportation from the exporter to the destination; follows the shipments to see that they
move on the required routs; and arranges for switching, unloading at the port of export,
repacking, and loading of the vessel or plane. The forwarder prepares the necessary
government documents for shipment, including those consular invoices and other
documents required by the importing country. Bills of lading and airway bills are
prepared and arrangements made for marine insurance if the shipper does not have cargo
policy. The forwarder also may furnish banks, shippers, and purchases with needed
shipping notices. The forwarder’s export knowledge is available to assist the firm on
general traffic management and export procedures. Both large and small firms find the
forwarder useful. In practice the forwarder also may provide packing facility and act as a
customhouse broker to facilitate the movement of goods through customs procedures.

Freight Rate Quotations

 Freight rate quotations can be obtained from a freight forwarder or from office of
a shipping company.

Shipping Documents
Shipping documents in international marketing include:
(a) Commercial documents employed by shipping forwarding and
insurance companies.
(b) Those required by governments. The details may please be referred to
in the chapter “Documents for exports.”

Part – II
PACKING AND PACKAGING FOR EXPORT

The aim of every exporter must be to ensure that the goods arrive safely in the
hands of the consumer. The fact that the goods are fully insured is in excuse for not
bothering to check whether damage or pilferage occurs during the transit. Whilst the
payment of the insurance claim may satisfy the buyer financially, it will not satisfy him
mentally. The buyer orders the goods because he can sell them, before the vessel arrives.
If he receives only a part of what he has handed in a saleable condition, he will probably
lose the goodwill of his customers and, in consequences, will blame the exporter.

Distinction Between Packing and Packaging

There is distinction between the terms packing and packaging. Packaging refers to
the job of providing specialised containers for the packing of goods. Packing is used for
the general operation of putting goods into containers for shipment and storage,i.e.,
transportation. Often, the only criterion used is that goods shall be packed so that they
can leave the works in a satisfactory condition, without regard to their condition on
arrival. Packing and packaging require serious consideration where goods are to be
transported or stored in a warehouse either for transshipment or distribution. The aim
should be to deliver the goods to the customers as cheaply as possible and when he wants
them, in a good and usable condition. The type of packaging is dependent to some extent
upon the type and mode of transport used.

Only two classes of exporters do not know the precepts of goods export packing.
They are:

(a) Beginners in export, and

(b) Those who do not care to establish a permanent export business.
Bad or insufficient packing affects both the exporter and the buyer and probably,
in the long run, the exporter more than the buyer. A part form the loss of customers, the
exporter will suffer because the marine insurance company will increase its premium for
him, if there is an undue number of claims: Moreover, the exporter will have difficulty in
getting clean bills of lading; and if his packaging are very bad, he may find it difficult to
persuabe the shipping company to accept his goods at all.
Objectives of Sound Export Packing

These are
(i) To insure the safe arrival of goods at destination. The type of packing which will
deliver the commodity in a good condition to the foreign customer will vary with:
(a) The product;
(b) The port of destination;
(c) The length of journey;
(d) The climate of the place of delivery;
(e) Heat and moisture to which the goods are subjected during the voyage.

Only experience and experimentation will prove or enable the exporter to develop
the type of container or packing that is best suited to the particular conditions.

(ii) To economise on the shipping space, Ocean shipping space is expensive and unless
care is taken to ecnomise on this space, it can often be as costly to the exporter as the
space actually occupied by the merchandise itself. Only ingenuity and engineering
applied to that end will produce the most satisfactory results.

(iii) To save expense by use of economical packing materials. It sin not always necessary
or even desirable to use heavy materials or to use first grade materials. As matter of fact,
great advances have been made in the use of heavy paper cartons, and some exporters.
Have found that certain products can be successfully shipped overseas in these carons.

(iv) To prevent pilferage. General safeguard against pilferage is to pack the goods
secularly and to put on the case nothing that will announce the character of its contents to
the intending pilferer.

(v) To insure the lowest possible customs duties. The basic rules to insure goods export
packing are:

(a) He should ask from the customers for complete instructions: how to pack his
order, what conditions it must withstand during the voyage, whether the
packing will affect the duties to be levied on the shipment. He should then
supplement this with advice form the shipping agents and from information
gathered from official reports.
(b) He should institute test in the factory to determine the strength of the various
styles of packing and should ask the customer to fill out a slip reporting the
condition in which the goods are received by him. Such a system, with the
results tabulated and kept on office record cards, will quickly and surely
culminate and difficult that packing might present.

Factors to be Considered in Export Packing

These are:
 (i) Strength. Container must be employed that will hold together during the entire
journey.
(ii) Climate. Climate as a factor influences packing, and is specially important in
the case of articles which are readily affected by heat and moisture. Not only
is it essential of for the exporter to know the climate of the country for which
the shipment is destined, but he must be informed as to the route which the
carrier of the shipment will take.
One of the common methods of protecting merchandise from adverse climatic
conditions is by lining the case, box, or other container with waterproof paper.
Additional protection may be obtained by placing the articles themselves in a
waterproof wrapper, thus providing two layers of waterproofed paper. Such
goods as biscuits and crackers destined for a tropical market call for a special
care to be exercised for protection form moisture. An extreme example is the
careful packing of tea, which must be packed not only against the usual
climatic perils but must also be tightly sealed so as prevent if from absorbing
odours and smells from the surrounding cargo. Hardware can be well
protected by wrapping each unit individually in water proof paper. The pieces
can then be enclosed in cartons and the cartons in cases lined with heavy
water-resisting paper. Many items of hardware are shipped in individual boxes
and packed in cases lined with waterproof paper. Highly polished metal
surfaces are particularly subject to the dangers of rust and corrosion. In order
to guard against this risk, it is customary to coat the surfaces thickly with the
slushing oil.

Transport and Export Packing

The exporter who wishes to keep transportation charges to the minimum must
consider both the weight of his shipment and the space it occupies. Ocean freight rate are
usually quoted for “weight or measurement, at the ship’s option”, and the basis which
yields the higher revenue is applied. Since in any vessel only a fixed amount of space is
available for cargo, many ocean shipment are is fact charged on the basis of the space
occupied by them.

Shipments of large and irregularly shaped articles, such as machines of various

types, may be reduced in bulk by disassembly. Articles of uniform shape may sometimes
be nested, resulting in savings in the cost of crating materials as well as of shipping
charges. Many types of merchandise may be compressed into bales.

Custom Duties and Packing

The manner in which merchandise is packed may materially affect the customs
duties levied on it. Before preparing his goods for shipment, the exporter should inform
himself of the customs regulations applicable in the country of destination. Generally
speaking the weight of the unit is of major importance. If the “gross weight” is applied as
the basis for import duties, excessive weight becomes unnecessarily costly. When “net
weight” is the basis, heavy outside packing does not affect the import duty.
Marine Insurance and Export Packing

Marine insurance companies are naturally interested in export packing methods

since it is to their advantage to reduce to the minimum the damage which goods may
suffer in transit. These companies are usually glad to extend advice based on their long
experience. One of the most fundamental factors taken into consideration by marine
insurance companies when quoting rates for specific shipper is the latter’s record of loss
and damage on his export shipments. If an export concern, in consequence of faculty
packing or other causes, experiences a consistently high degree of breakage, pilferage,
nondelivery because of improper marking and other losses resulting in insurance claims,
there is little question that it will be obliged to pay higher premiums for its marine
insurance. If damage is heavy and can be prevented but no steps taken to terminate the
cause of loss, the insurance company may well refuse to extend further protection. On the
other hand, if a company packs its export goods properly and thus creates a good record
with its marine insurance company, the latter will quote the most favorable rates for it.

Some Solutions for Packing Problems

There are a few practical suggestions which may be profitably offered to Indian
exporters at this point.
(i) Goods can be packed in a way which is the best from the safety transit
angle. Only in the case of highly dangerous materials do the shipping
companies lay down specifications for packages. The choice of package is
largely in the hands of the exporter himself; and when making this choice,
he should bear in mind the conditions which the goods will have to stand
up to, and remember that, in loading and unloading, goods and packages
may be handled somewhat wrongly in the exporter’s own ware house.
(ii) Consider that much of the loading and unloading will be done by cranes
which lift the package by means of hooks. It is doubtful whether there is
any benefit in printing on the packages the words: “use no hooks.”
Especially when it is more than likely that the stevedores at the other end
of the journey cannot read even if they would bother to try to do so. It is,
therefore, foolish to trust to luck, and use, for instance, jute bales for
packing goods which can be irrevocably damaged by crane hook. Nor is it
worthwhile to use a thin wooden case, which can be similarly damaged.
On the other hand, the use of heavy wooden cases for packing such
materials as raw cotton, cereals and other commodities which are well
suited for packing in bales or sacks would be unduly wasteful.
(iii) Liquids in bulk will normally be shipped in drums of the gallonage
specified by the customer. Drums of 5-gallon capacity and over can be
shipped “naked” (that is, without, any surrounding case or crate provided
that they are of sufficient thickness). If the drums which the manufacture
normally uses for his internal trade are too thin for safe export shipment, it
will be necessary to calculate whether it will cost more to buy heavier
gauge drums or to pack the existing containers into a wooden case. It is
 not recommended that a manufacture should try to ship goods in 4 gallon
square kerosene type tins without the protection of a wooden case encased
not only for protection but also because some dock charges are levied at so
much per package and these charges would be 24 times as much on 24
separate tins s they would be one case containing 24. A drum containing 5
gallons of liquid will weight between 50 ibs and 65 ibs, according to the
contents; and, for the safe carriage of this weight, drums made of 20/22
gauge plate are recommended. Ten-gallon drums should be made of not
less than 16/8 gauge material; 40/45/50- gallon drums are shipment. Quite
a lot of commodities are shipped in second- hand drums; but this is a
practice which is not recommended. When, however, it is adopted, care
must be taken to ensure that the buyer is in agreement with the practice.
Wooden crates may be used when the goods that are shipped cannot be damaged
by water and when a small number of fairly larger-sized items are to be packed together.
It may, however, be remembered that crates have sizable openings and fragile goods
should not be packed in crates owing to the possibility of the gods being pierced through
one of the openings in them.

Wooden cases are probably the most common form of packing and will do good
service if proper attention is given to their construction. In the packing of small items and
consumer goods, the manufacture should consider how he is going to pack his goods
before he even starts to offer them for export; and he can then include details of the
method of packing in his price list, in his quotations, and on his proforma invoices.
According to the usage of the trade and the total weight and the convenience of packing,
he should decide on standard cases for his products. If the buyer knows about these
standard cases, he can order accordingly; otherwise the manufacture may be faced with
an order for a quantity which is difficult to pack safely and wasteful shipping space. The
buyer is much more satisfied when he receives the consignment with an equal number of
items in each case, for it facilitates his checking, warehousing and dispatch. There are no
firm rules about how this should be done; common sense is the real guide. However,
wherever possible, the gross weight of any package for shipment to main would ports
should not exceed around 200/220 Ibs, whilst smaller packages are preferable if the cost
is not prohibitive. The size of the case should be the absolute minimum into which the
required goods can be packed. The goods should fit snugly and tightly into the case; there
should be no room for them to shake around. Also, as marine freight is charged on the
basis of the space which the cases occupy, there is obviously no sense in paying marine
freight on empty space or on excess packing materials. It is, of course, important to see to
it that good quality, straight grained, knot free, timber is used for the manufacturer of
cases. It is quite definitely a false economy to accept below standard timber.
The thickness of the timber must also be considered. Again, while there is no
definite rule, it sis suggested that, for cases which will have contents weighting between
50 Ibs and 100 Ibs the thickness of the timber should be not less than 1/2”; for cases
containing 100 Ibs to 150 Ibs, a thickness of 5/8” is recommended as the minimum; for
150 Ibs /200 Ibs, 3/4 “and for 200-250 Ibs 7/8”, and so on, the thickness to be increased
by 1/8” for each 50 Ibs addition in the weight of the contents. The design of the case
should increases its protective capacity, the safest shape of all is a cube. Case with one
measurement much longer than the other should be avoided, as far as possible. When it is
possible to arrange for cube shaped cases, the tow opposite ends of the case should be
battened. This would mean that there would be a double thickness of timber around the
edges of the two ends, and that these battens give the case extra rigidity, makes it possible
for the lid to be nailed down securely, and give the case extra protection against any
impact. When a case with a much longer measurement cannot be avoided, it should be
battened around. In other words, all around the case are fixed pieces of the same
thickness of timber and approximately two inches wide; and for all except the very heavy
cases, two such battens are required. These give the case extra strength on its weakest
side. Battened round cases are also used when the contents are likely to be affected by
moisture seeping up from the floor on which the cases are standing. The measurements of
cases for the calculation of marine freight are taken between the two points which
protrude furthest, so that a case with a battens around it will be considerably more
expensive to ship than the one without the battens. For protection against pilferage,
wooden cases should be hoped. This means that a thin steel band about 1/2" to 3/4" wide
is nailed all around the case at each end. Instead of the case being hopped in this way,
protection against pilferage can also be achieved by strapping the case with steel banding
of the thickness, but applied with a special strapping machine which not only pulls the
banding tightly but also applies a special seal which a pilferer cannot replace. For extra
security, flat metal seals with points at the base can be applied by hammering over the
joints in the case thus making it impossible for a pilferer to open the case without
breaking the seals.

The sort of internal packing material required depends upon the type of goods
contained in the cases. If the goods are not fragile, it is preferable to pack them tightly in
the case without any protective packaging materials. This is especially necessary when
such non-fragile goods are themselves wrapped into cartons before being packed into the
case. Over-packing is a fault, although it is fault on the right side, and is wasteful both of
packing materials and of shipping freight costs. However, even with such non-fragile
goods, the case should be lined inside with bituminous paper to provide waterproof and
moisture-proof protection and prevent rust and corrosion. One warning here- if the goods
are liquid goods or if a mineral oil is used, the use of bituminous paper should be
avoided, for any seepage of the liquid will tend to dissolve the bitumen coating and result
in a stickly black mess. When the goods are fragile, extra precautions must be taken, and
it is not enough to put all the contents together and just surround the lot with protective
material. Each item of bottled goods, china and glassware should be encased in a sleeve
(i.e., in an individual wrapper of corrugated paper). In addition, a layer of at least1/2” all
round the inside of the case. Whilst straw can give good protection, there some countries
which either ban or impose heavy penalties on the import of goods packed in straw an
similar untreated vegetable materials because of the risk that such materials may carry
infection germs. Waste paper is often used for such packing, and it does give quite a good
protection; but its appearance does not recommend it for general usage. Of all the
available materials, wood wool is the best for general purposes, for it is clean and has a
good resistance to shock. Many non-fragile goods can be shipped abroad in fibre board or
corrugated board packages. Such packages, however, are only generally suitable for
contents with a weight not exceeding 56 Ibs; and even then it is necessary to use the
appropriate thickness of material for the manufacture of cartons. But before adopting this
form of outer packing, it is as well to give a sample of the shipping companies upon
whose vessels it is expected that shipments would be carried and obtain an assurance that
such packages will be accepted for shipment without an endorsement about insufficient
packing on the bills of lading.

Selection of Containers

The choice of a proper outer container is the first step in good packing. The
following factors should be considered in designing containers for use in a given
instance:

(i) Suitability for articles to be packed;

(ii) Availability;
(iii) Tare weight;
(iv) Cubic displacement;
(v) Ease in handling and storing; and
(vi) Cost.
The cost of containers would be a prime consideration:

(a) A container may be low-priced and disposable by the customer;

or
(c) It may be high priced and re-usable.

The high degree of disposability of old containers may entail their return to
sender; may be re-used; or burned or otherwise destroyed.

Efficiency
To ensure efficiency and safety;
(i) Goods must be packed easily
(ii) Packages must be designed for easy handling;
(iii) Containers must comply with regulations.
(iv) The designs adopted must meet the customer’s needs; and
(v) The container should be capable of being easily unpacked.

User
The following points should be considered in so far as the needs of the user are
concerned.
(i) Requirements for storage.
(ii) Handling facilities.
(iii) How does the user recover the contents?
(iv) Is packaging either permanent or for intermittent use, or will it be
discarded immediately after opening?
(v) Can customer convenience be improved?
(vi) Are he goods to be used individually, or to be dispensed and sold from the
containers?
Principles Governing Packaging for Transportation
These are:
(i) Protection from corrosion;
(ii) Protection from damage during loading, unlading and transit;
(iii) Economy in the use of packing material;
(iv) Facilities for handling at the suppliers’ and customers’ end; and
(v) Observance of railway and shipping rules.

Case Marking and Labelling

(i) Case markings facilitate identification of packages.
(ii) Shipping companies generally insist on such markings.
(iii) The markings to be given are at times specified by the buyers when
placing orders.
(iv) Where these are not given, the suppliers give their own markings.

To ensure that the goods, are cleared at the buyers’ end, the packages must be
quite clearly marked. There must be some identification so that all the packages in the
same consignment can be related to each other and identified when the buyer comes to
take delivery.

Moreover, the vessel will carry cargo for a number of ports. Therefore, there
should be an indication as to where the goods have to be transhipped.
These markings must be simple and easily readable so that the cases can be
identified by dock workers and others.
It is usual to have, as part of the markings, a simple design, such as a circle, a
diamond, a square, a star or a triangle or any other pattern which can be easily reproduced
by stenciling.
A A

G
HKS M G HKS M
421 421

ADEN 2/7 Baghdad via Basrah

4/4

Inside the pattern will be one, two, or three letters (probably the customer’s
initials), and underneath the buyer’s order number.

On the top or at the sides outside the pattern, there may be two or three other
letters, representing the exporter’s initials.

Below the pattern will be the name of the port at which the buyer will receive the
goods.
If the goods are to be transhipped en route, the name of the final port of
destination will be followed by the words “via….” The Name of the transshipment port
will be filled in the blank space. Some shipping companies demand that the cases should
be marked with bands of different colours for different ports so that these cases may be
identified for off loading purposes at the right port by workers who cannot read the name
of the port. Gross net weight must be shown for import duty purposes.

All these markings should be stenciled prominently shown in letters and/or

figures of about 1/2" to 1”/ Waterproof ink or paint should be used for this purpose.

After the shipment has been properly packed, it must be marked and labeled to
meet the requirements of three interested parties:
(a) Shipping agencies;
(b) Customs officers; and
(c) Consignee, who maybe either an importer, or his representative or his
customer.
(a) Shipping Agency

The steamship company will not accept the cargo offered to it, for transportation
unless it is legibly marked. An identifying symbol or number must be shown on the
cases. In marking a package, care must be taken to efface all the old consignment marks,
if any exist. This may be expensive or tiring process; but failure to do so often results in
shipments going astray.

The actual marking may be made with a brush, stencil, crayon (not chalk), rubber
type, metal type, pasted label, tag or other method so that the marks may be durable and
legible. The most satisfactory marking results have been obtained by the adoption of the
stencil. This is particularly true where the packages are destined to the same consignee
time after time. The lampblack brush or free-hand marking is rapid and efficient where
the destinations are diversified; but care must always be taken to make all marks legible.
Stencil marks cannot always be placed effectively upon bales, bages, bundles, steel rods,
and certain other pieces of freight. In such cases, tags made of cloth, metal, leather,
sulphite fibreboard or other material which is strong enough to withstand the wear and
tear incidental to shipment may be used. They must be securely attached with a
reinforced eyelet to the bag, bale or bundle. Furniture is often marked by tying
identification tags securely with a length of wire or strong cord. On lumber pieces, all the
four corners of the tag in use must be tackled.

(b) Customs Requirements

The customs regulations of foreign countries pertanng to the labelling of various

kinds of imported goods are detailed, definite, and strictly enforced. Generally speaking,
merchandise must be marked with the name of the country of origin. Frequently, customs
regulations also require that the measurements of the packages be marked on the outside.
Markings, of course, must not injure the merchandise. When marking or labelling is
required, the words must appear in a conspicuous place and be of a permanent nature —
that is they should not be capable of erosion under the ordinary conditions of the voyage.

Not only are heavy fines and penalties imposed, for any violation of such provisions
but they are especially heavy if the violation is suspected of being fraudulent. Delay and
extra costs, which are imposed upon the importer, make this a matter of considerable
importance to both the exporter ‘and the importer. Customs regulations of foreign
countries are also frequently strict in so far as the labelling of individual packages is
concerned. The regulations of each country should be carefully observed with a view to
avoiding unnecessary difficulties, delays and expense.

Importer’s Requirements

For the purpose of aiding the importer and his agents in handling packages in
accordance with best commercial practices, a scientific marking policy to cover all
shipments must be adopted. The object of placing additional marks on each package,
other than those for transportation and customs purposes is:

(1) To enable the particular shipment to the readily recognised and picked out from
the many others arriving at a busy dock;
(ii) To facilitate the singling out of a particular package of shipment for such
purposes as sampling, repacking, expediting by express, or warehousing;
(iii)To make known the contents of a package without removing the outer packing
case and unpacking the goods;
(iv) To facilitate the obtaining of information about the ultimate consignee through
the symbols so as to reduce the number of marks on the case and keep the trade
information secret;
(v) To further aid in forwarding and distribution.

Among the rules to be followed in marking the consignment are:

(i) Remove all the old marks;
(ii) Use only the necessary marks;
(iii) Use no advertising;
(iv) Keep the contents of the package secret;
(v) Keep the names of the shipper and consignee secret;
(vi) Mark plainly to avoid error;
(vii) Place marks in several prominent places;
(viii) Place the markings in a permanent manner;
(ix) Use a distinguishing symbol embracing a code to indicate
(a) The shipper;
(b) The consignee;
(c) The order number;
(d) The name of the destination; and
(e) The serial number.
(x) Mark, showing the weight and measurement.
The leading requirements of a good symbol are:
(i) That it be easily distinguished;
(ii) That it has originality;
(iii) That it be easily stamped on the package;
(iv) That it shows by an initial or a number, the name of the shipper or manufacturer;
(v) That it contains a letter, number or a combination of both to represent the
ultimate consignee, who may be the importer or his customer;
(vi) That the lot or order numbers indicate the contents of the package;
(vii) That the name of the city or town of final delivery be given; and
(viii) That a serial number be given.
 Reconciling the Packing Factors: With such an array, of problems the export
packer has no easy task. The most difficult considerations to reconcile are safety and
economy. In endeavoring to guarantee, safety, weights may be increased and economy
sacrificed or the pursuit of economy may sacrifice safety. The task is to find a method
that is both efficient and safe. Safety is the fixed factor and is of primary importance.
Freight rates and customs duties should be reduced to the detriment of security from
damage or pilferage.

In studying this problem the exporter is not left entirely to individual resources. The
services of expert packers and international freight forwarders may be employed, along
with securing advice from several other sources. Advice can be obtained from
associations of container manufacturers, from packing engineers, and from marine
insurance or Indian Institute of Packaging.

Unitization

In order to facilitate efficient handling and to protect merchandise during shipment

and storage, shippers have combined the individual cans, boxes, or units of their products
into larger cartons. These cartons, in turn, have been combined into larger containers or
stacked on pallets and banded together to form a single package. This unitization process
permits the handling of one large package, rather than many small ones, and reduces the
number of times that individual items must be handled. The larger lots-pallets or
containers — can often be moved by mechanical handling equipment. Unitization strives
for the reduction of handling costs as well as reduced losses from damage and pilferage.

Palletizing

Palletizing is one method of unitization that has been practised for many years in
handling freight. It is the process of stacking packages on a platform, usually of heavy
lumber, elevated at the bottom to permit the use of forklift trucks. The cartons, or items to
be palletized, are banded together in a manner that assures safe handling as a unit.
Packages of all kinds can be palletized and stacked in the hold of a vessel, truck or
airplane.

Containerization

Containerization has become an important factor in physical distribution. While a

container can be any box, bottle, bag or similar device for holding a product, the term
used in this section is in a more technical sense. By container we mean a relatively large
box suitable for repeated use by several modes of transportation without intermediate
loading and unloading. Shipping containers usually are made of steel or aluminum, but
plywood or fiberglass may be used. The containers replace packing crates, although
individual items must still be properly protected.

If the container is to achieve maximum utility, it must be designed to accommodate the

requirements of intermodal transportation since most international shipments involve the
use of more than one mode of transportation. Goods are often placed on rail cars or trucks
at the manufacturer’s plant and forwarded to the port or airport where they are put on
planes or ships for movement to the foreign port. At the port they are again transferred to
trucks or rail for carnage to the customers’ location. If the container is to minimize the
handling of individual items, it must be usable on all these modes.

For the international marketer the container holds several potential advantages.
The greater strength of the container reduces the possibility of damage occurring during
the transportation and handling phases of distribution. Reduced pilferage results from the
greater security provided by a metal container and the possibility of door-to-door service
in the original container. Packaging costs are lower with containers for many items. The
container revolution also promises the possibility of simplified documentation. In the
case of air freight, shippers pay a standard unit load device rate for shipping in approved
containers. Ocean freight, however, continues to move on commodity rates, and the use
of a container may or may not result in a discount.

Marketers should also be concerned with containers because of their potential for
expanding the market for products and because they may provide opportunities for
alternate routings. A United Kingdom manufacturer furnished one example of containers
as a tool for market penetration. The company made a cost analysis which showed a
marginally higher cost for sending shipments from the United Kingdom to the Middle
East-using overland routes with containers rather than its previous system of ocean
freight and conventional packing. However, the company reported that demand increased
due to improved quality of the product. Some of the improvement was due to reduced
transit times, as these were more than fifty per cent lower on the overland route.
Furthermore, the containers with their driver — accompanied units enabled the company
to maintain reliable transit schedules. Damage and pilferage were lower, and the reduced
transit time aided the company’s cash flow.

The Points to Consider for a Container and Package Design

(i) Maintain the stock in good condition. Ensure quality control;

(ii) Ensure that the full quantity reaches its destination;

(iii) Facilitate counting;

(iv) Facilitate removal from container for use;

(v) Container should have clear labels;

(v) Container should have clear labels;

(vi) Container may incorporate pre-printed data instructions, booking-out records;

(vii) Provision may be made for stacking;

(viii) A recessed base, etc., may be required for pellet trucks;
(ix) Weight limitations for manual handling may be indicated;
(x) Container should resist tough handling;
(xi) Speed in handling and loading may demand that light weight materials be used in
the construction of containers;
(xii) Security against hazards, fire, containerisation, corrosion, etc., should be attended
to;
(xiii) Security against pilferage should be ensured;
(xiv) Empty containers may need to be returned from the work centre or customer and
 for storage when empty;
(xv) When dispatching loose articles in bundles, make sure that they are securely tied
and, in the case of rods, etc., the ends of the bundles should be sufficiently packed
to prevent slipping;
(xvi) Humper lids should be fastened with wire and sealed with your seal or padlocked;
(xvii) Avoid making valuable goods too conspicuous. Slogans or trade marks easily
identify vulnerable goods. Enclose a packing note in the package but never list the
contents on the outside;
(xviii) Parcels are best sealed with a gummed paper strip or self-adhesive tape. Packing
paper or cartons should be of a stout quality;
(xix) Wooden cases and crates should be made of sound undamaged timber, closed with
will-driven nails of the right length. For added safety, use steel banding or wire;
(xx) Canvas bales should be stitched tightly. Close coloured string to facilitate opening.
(xx,) Cardboard containers and cartons must be rigid and undamaged; they should be
closed with gum and secured by steel banding; second-hand cartons with soft
seams and damaged compartments are liable to burst easily;
(xxii) Lids, stoppers and caps on bottles, jars, etc., should be firmly secured;
(xxiii) Where cases are returnable, provision should be made for opening. Cases are
sometimes received which are so cleverly nailed and battened that they must be
completely destroyed when opening. One simple instruction, “Open here”, may
save a case from being destroyed, and the contents from possible damage;
(xxiv) Where fork-lift trucks are used, the batten centres may be important. If so, the
purchaser should state the measurements for forks’ entry
(xxv) If cases are to be stacked where the public have access to them, it may be necessary
to specify that all sharp corners be removed.

Packing List

The packing list, which may be shown on the commercial invoice or separately,
should contain item by item, the contents of cases or containers or of a shipment’s cases,
with each item listed separately and with its weight and description set forth in such a
manner as to permit a check of the contents by the customs on arrival at the port of
destination as well as by the importer. The packing list must be made in accordance with
the instructions of the customer. Great care should be exercised to make certain that the
contents of the packages are exactly as indicated in the packing list. Any variation from
what is shown in the packing list, commercial invoice, or consular invoice may, and
usually does, render the consignee liable to heavy fines.

In short, in the matter of packing for overseas markets, the exporter should take
into account not merely the preference of the foreign buyers and users but also the
original purpose of packaging, namely, the preservation, protection and proper
presentation of the goods. The preservation of the quality of the contents is the most
important aspect of packing, which the exporter should always bear in mind. Different
types of goods require different types of packing to preserve the quality of the contents;
for instance in order to preserve the quality of pepper and cashew nuts, it may be
necessary to pack them in moisture-proof polythene bags or tin containers. Similarly,
food articles have to be packed very carefully and in sanitary cans.

It should be borne in mind that goods meant for export have to undergo severe
hazards in transit, for they are loaded and unloaded at various stages. The size of the
packing has also to be taken into consideration. At certain points~ for instance, at some
ports, packages only of a certain maximum size can be conveniently loaded and
unloaded.

The exporter should also give due thought to the presentation of the contents. The
packing layers, next to the contents, have to be attractive; and it is here that the exporter
should take into account the preference of the buyers in a particular country. The contents
of the different packages should be uniform as far as possible, in order to facilitate the
assessment of the quantum of the goods with reference to the number of packages.

The main object behind making export packages is to identify the cargo.
Normally, ships carry a large number of consignments belonging to various exporters. If
adequate identification marks are not placed on goods, it would be really difficult to
identify the consignments of each exporter. In order to facilitate the inspection of the
goods by the customs authorities and their quick and effective delivery at the destination
by the railway and shipping authorities, it is essential that the exporter should avoid a
multiplicity of markings and, at the same time, put legible markings, preferably printed
and of adequate size on the packages. The marks should correspond with these on the
shipping documents and invoices. Marking should be in an international language, say,
English; in addition, such other markings as are required under the regulations of the
country of destination may also be placed on cases and/or packages.

In the case of goods which require to be specially handled, such instructions

should be given on the packages as: “Stow away from boiler”, or “This side up”, etc.
These instructions apply to markings on the Outer cover of the packages. Markings on
the inside packages containing the goods are essential partly from the advertisement joint
of view (since they indicate the name of the country and possibly that of the manufacturer
or exporter) and partly under regulations under the Merchandise Marks Act. In marking
the goods, the exporter should ensure that their appearance is enhanced and that no part
of the goods is wasted.

Generally speaking, the standards fixed under the various quality control schemes
provide for standardised packing and marking. This should be adhered to by the trade. An
important point to remember here is that arrangements for obtaining the delivery of the
goods from the manufacturers, their transportation to the port and loading on to the ship
require to be dovetailed into the procedure for preshipment inspection, for any dislocation
at the inspection and is likely to throw out of gear the other arrangements of the exporter.

DISTRIBUTION CENTERS

The distribution center is an integral part of the international physical distribution

system. The center is a warehouse that provides a merchandise assortment to meet
customer requirements. Products are shipped in large lots to the warehouse where they
are sorted into individual customer orders. The warehouse assembles assortments, stores
merchandise, and prepares and arranges delivery of customer orders. Products are stored
in the distribution center to replenish customer assortments, to adjust seasonal production
to demand, to prepare for erratic peak demands, and to take advantage of quantity
purchases or freight rates. The emphasis, however, is on maintaining a supply to meet
customer requirements rather than emphasizing long-term storage.

The term “distribution center” is used in this chapter rather than warehouse
because the centre frequently serves as more than a storage and bulk point. It also serves
as a control center to assure that customers’ orders receive prompt attention, that
adequate but not excessive inventories are available, and the necessary data are gathered
to facilitate control and documentation requirements.

The multinational firm with several production points may find it advantageous to
use distribution centers that are oriented toward production points as well as centers that
are market positioned.

The Public Warehousing Alternative

In the previous discussion, there has been a tacit assumption that the owner of the
merchandise operates the warehouse or distribution center. This concept is known as
private warehousing. It is a viable approach when the demand for the firm’s products is
substantial and steady; however, private warehouses entail a high level of fixed expense
and can be costly when demand fluctuates widely. The warehouse facility must be built,
bought, or leased and personnel must be hired and trained; furthermore, the company
must establish a transportation network for servicing distributors and dealers.

One alternative for the firm is to use public warehouses. These are owned and
operated by professional warehouse personnel and furnish not only space and break-bulk
facilities, but also a wide variety of services related to physical distribution. The user of a
public warehouse pays only for the space that is used plus the fees for services that are
requested. Public warehouses will receive merchandise, store it, and assemble and deliver
products as they are ordered by the customer. Public warehouses also aid the producer by
issuing warehouse receipts that can be used as collateral for bank loans. Some
warehouses also provide space for a firm’s branch office.

Some public warehousing firms have expanded their services beyond those
normally associated with physical distribution in order to provide customers with a more
integrated distribution system. One firm, for example, in addition to warehousing offers
customers brokerage, freight forwarding, packaging, insurance, and transportation service
to all of Europe and the Middle East. In summary, the public warehouse provides the
shipper with the flexibility to adapt to local conditions, provide rapid service to
customers, and capitalize on local expertise regarding freight rates, tariff systems, tax and
licensing laws, and business customs, as well as storing merchandise

Part - III

MARINE INSURANCE

What is Marine Insurance?

Marine insurance is a contract of indemnity whereby the assurer or underwriter

agrees, for a stated consideration, known as the premium, to protect and indemnify the
shipper and/or owner of the goods against loss, damage, or expense in connection with
the goods at risk, if the damage is caused by perils specified in the contract known as the
policy of insurance.

When the goods have left the shipper’s plant or warehouse and are in the course
of transportation, shipper has no physical means for the protection of these goods and
must rely upon the ability of the transportation company to which he entrusts them for
safe delivery at their intended destination. In addition, there are perils and hazards which
the goods may encounter and which are beyond control of the carrier. Hence the
importance of marine insurance can well be appreciated.

The carrier in export trade is not an insurer of merchandise. He is exempted by

law from certain causes of loss as well as from the conditions and stipulations which may
be entered in the contract of carriage between the shipper and the carrier. For these
reasons, the merchant must have some means of protecting himself against losses which
he may not be able to recover from the carrier under his bill of lading. He, therefore,
insures himself against loss or damage.

Despite the fact that they are covered by.~c1ean bills of lading indicating that
they were apparently in good order and condition when received on board, the damage to
the goods might occur in transit, especially if it encounters hazardous conditions during
the journey. The buyer may have to pay for the goods before he sees them; or even after
lie sees them in the customs shed at his end, the goods may be damaged or pilfered before
reaching his warehouse. Another point to be considered is the fact that where no letter of
credit has been established, the goods most probably remain the property of the exporter
until the buyer takes up the documents; and if that buyer gets to know that the goods have
been damaged in transit, he may refuse to retire the draft.

Although a bill of lading are the title to the goods, that title is only worth as much
as the goods themselves; and if the goods are worthless because of the damage caused to
them, the title to them, too, is worthless. But if the goods are properly insured, then,
irrespective of whether they suffer damage or not, the worth of the title remains; and, for
this reason, goods cannot be shipped abroad unless they have full insurance cover. In
most cases, the insurance is the responsibility of the exporter; and he must arrange to
insure the goods on C.LF. transactions.

Subject Matter of Marine Insurance

There are three classes of properties which are the subject matter of marine
insurance:

(1) Cargo insurance;

(ii) Freight insurance; and

(iii) Hull insurance (insurance of the ship).

In the C.I.F. price quotation, it is only the cargo which is insured because the
freight has already been paid. However, freight insurance may be taken out either by the
cargo-owner or by the shipping company if freight has not been paid.
 The exporter, who only makes occasional shipments, advises the insurance broker
or company of the full details of the goods to be shipped, giving the number of cases, a
brief description of the goods themselves, the markings on the cases, the name of the
ship, the port of shipment and the place of destination to which he is sending the goods,
and the value for which he wants the goods covered. At the same time, he has to state the
risks which are to be covered. The insurance broker, or company, then issues the
appropriate policy of insurance to cover the shipment; and this policy is required in
duplicate. As this policy is issued in the name of the shipper, it must be endorsed by the
shipper before it is handed over to the bank so that, whoever has the benefit of the bills of
lading, may also have the benefit of the insurance cover and can claim reimbursement for
any damage or shortage.

It may occasionally happen that a letter of credit asks for insurance policies in
favour of the bank which originally opened the credit; and this can be arranged either by
asking the insurance company to make out the policy in favour of the required party or by
the exporter endorsing the policy is follows: “Pay any claims arising under this policy of
insurance to the order of—” and then signing the endorsement.

When the exporter has done a fair amount of export trade with several shipments
per month, arrangements for an insurance cover can be speeded up and simplified by the
exporter having an “open cover” with the insurance broker or insurance company. The
exporter tells the insurance broker what his estimate of the total value of his export
shipments for the next twelve months and also what he anticipates will be the value of the
largest single consignment which he is likely to ship.

The insurance brokers for insurance company then agree to give the exporter an
insurance cover for any shipments made within the limits estimated without the necessity
of the exporter having to advise them in advance. The exporter is issued a pad of
certificates and he himself fills in the details of each shipment, which is to be covered for
insurance — the details being the same as those of which he would advise the insurance
brokers if he wanted a policy as described earlier. These certificates are in sets of four —
the first two are the originals and the other two are non-negotiable copies. The originals
valid as part of the thipping documents, whilst one of the copies is sent to the brokers or
insurance companies that they are advised of the risk that has been covered and can make
the appropriate charge for premium. The other copy is retained in the exporter’s file for
reference and for checking the insurance broker’s bill for premiums. These certificates of
insurance have to be endorsed in the same way as insurance policies are endorsed.

Care to be Exercised

Care must, however, be taken to see to it that insurance policies or certificates are
properly initialed because they are legal documents. If, with an open cover, the exporter
has an order which is larger than the one he originally estimated, care must be taken to
see to it that the limit amount for any one shipment, which is shown on the certificates, is
altered and it is necessary to send all the four copies of the certificates to the insurance
company or brokers for an official approval of the alteration.
If the exporter has underestimated the total yearly value of his shipments, he
would ask, before the total value has been reached, for the total cover to be extended, and
the insurance company or brokers will be glad to agree, provided that there has not been
any excessive number of claims against the earlier shipments.

10 PER CENT EXTRA OF THE ACTUAL C.LF. PRICES

It is usual to cover 110 per cent of the actual CJ.F. prices of the goods. The reason
for this is that, in addition to having paid for the C.I.F. cost of the actual goods when he
retires the drafts (or makes payment, or has accepted to make payment in any other way),
the buyer has probably also paid for the customs clearance and for the unloading and
transit of the goods to his warehouse. There are a few instances when these charges have
been exceptionally heavy or when the customs duty cannot be reclaimed even though
paid on worthless goods, in consequence, the shipper will be asked to cover the goods for
up to 150 percent of their C.I.F. value. The exporter must bear in mind that, where such
heavier than normal cover is requested, the premium for insurance is considerably higher,
and the buyer should be asked to confirm that he will pay the cost of the excess premium.
The exporter should also remember that it is as well to cover for 110 per cent for
his own sake, especially when the shipment is not covered by a letter of credit because it
may so happen that the buyer, instead of himself collecting the insurance payment for
damaged or missing goods, may send the certificate or the policy back to the exporter,
asking the latter to replace the damaged or missing goods and reimburse himself by
collecting the insurance money. Such a procedure will mean a higher transit cost to the
exporter; and this is covered by the extra 10 per cent cover.

Types of Risks Insured

There are many possible risks for goods that are shipped abroad, apart from the
possibility of the sinking of the ship itself. She may run into a heavy storm, and the cargo
may be damaged by rain or sea-water. There is always the risk of fire or of some of the
goods being stolen. Some letters of credit specify the risks which must be insured against.
The usual procedure, therefore, is to have an “all risks policy”. It is not worthwhile for an
exporter to try to save on premium payments and hence a less comprehensive policy
because a few banks, negotiating letters of credit, accept such a policy. A reputable
insurance company or a reputable firm of insurance brokers will give the “standard all
risks cover” and issue polices and certificates to that effect which will be acceptable by
any bank.
The standard “all risks” cover, however, is not quite sufficient for this policy
which covers only normal civil happenings. Cover will also be invariably required
against “war risk” even in peace time. The exporter should, therefore, instruct the
insurance brokers or the insurance company to include a war risk cover, which they will
do by endorsing the policy and/ or certificates.
As already indicated, damage or pilferage may occur while the goods are on
board. In fact, much of the damage and pilferage occurs during loading or unloading or in
transit to the docks in the country of shipment or in transit from the docks at the
destination. The exporting manufacturers see to it that the goods are packed safely and in
good order at his warehouse; and in normal circumstances, the goods are not seen again
until the cases are unsacked in the buyer’s warehouses. The exporter cannot reasonably
have all the cases examined immediately before the goods are loaded on board; and the
buyer cannot open all the cases for a thorough examination at the docks at his end. Yet
goods are damaged by being left out in the rain on the dock, or by being loaded with
hooks when they should not be so loaded, or by pilferage by dock workers and dock-side
thieves. To cover these risks, it is advisable to have a “warehouse-to-warehouse” cover,
which is quite normal and which covers all the risks from the time the goods leave the
exporter’s warehouse up to the time they arrive at the buyer’s warehouse. This is usually
modified slightly by limiting the period of cover after the arrival of the ship at destination
to 30 days irrespective of whether the goods have reached the buyer’s warehouse or not.

Marine Insurance Claim

Under an ordinary marine insurance cover, if the goods have been damaged or
pilfered or lost, the buyer report the fact immediately to his local agents or the local
branch of the insurance company or to the firm of insurance assessors. They examine the
goods and certify the extent of the loss. The buyer then works out his claim on the basis
of the proportion which the damaged goods bear to the whole consignment. For instance,
if the exporter’s invoice value for the goods which are damaged is Rs. 400 and the total
of the exporter’s invoice Rs. 40,000 (i.e., 110 per cent of invoice value), the amount to be
claimed will be:

RS .400 ×Rs .44,000

= Rs .440
Rs .40,000
If the goods have been invoiced on F.O.B. value plus the cost of marine freight,
insurance, and shipping charges, the buyer is entitled to claim a proportion of such
charges. For instance, the total F.O.B. Value of goods shipped is Rs. 2,000; Rs. 400 has
been added for the charges mentioned, making the invoice total Rs. 2,400. The insurance
cover would normally be for Rs. 1,640. If Rs. 200 worth of goods are damaged or lost,
the claim will be for Rs. 264, which is represented by:

RS .200 × Rs.2, 640

= Rs.264
Rs.2, 000
The buyer would send the original insurance certificate or policy to the broker or
company which issued it, with a statement of the claim and the latter would send him the
money. Alternatively, the buyer may send these paper to the exporter and ask him to
make the claim on his behalf, and either credit the amount to the buyer’s account or remit
the money to him.

This claim procedure may be quite a nuisance; and a certain proportion of the
claim is lost in the costs of transmission and exchange into buyer’s currency. To avoid
this nuisance and expense, therefore, it is usual to have a C.P.A. policy for marine
insurance. The letter of C.P.A. is referred to claims payable abroad. This facility costs a
little extra but it is well worth paying for it. On a certificate or a policy of insurance,
when the C.P.A. arrangements have been made, there will be words to the effect that
insurance agent — is authorized to settle any claims arising under this certificate or
policy of insurance; and, in the empty space, will be filled in the name of the town or city
at which the insurance agent nearest to the buyer is located (usually the port to which the
goods are consigned). Under these arrangements, the buyer can set his claim paid in his
own currency on the spot.
 It might be advisable even in some cases of cost and freight (C & F) shipments
that the exporter should also get an insurance cover. This should be done when the
exporter ships goods without being covered by a letter of credit. The goods are still the
exporter’s liability until buyer has taken up the documents; and if he (the exporter) fails
to do so and damage or loss occurs, the exporter will suffer, for he will find it difficult to
make a claim under the buyer’s insurance agreements.

The cost of marine insurance premium is quite low, and reliable exporters, doing
a fair amount of business, can probably get all the risks covered by paying 1/2 per cent
and 1 per cent of the value insured, depending on the type of goods that are insured and
the type of containers in which they are shipped. For instance, the insurance premium on
goods packed in glass bottles is considerably higher than on the same goods packed in tin
cans. It is quite possible to get a standard rate, irrespective of the destination of the goods.
In addition, there may be an extra premium on war risks cover, which varies considerably
according to the country of destination and in the light of the political conditions
prevailing in the country of destination or in countries en route at the time of shipment. A
small extra fee is payable for C.P.A. facilities. On normal goods to normal destinations, it
should be possible to secure an insurance cover for all the risks including war risks under
C.P.A. at an average cost of about one per cent to 1¼ per cent.

Some Practical Suggestions

The following suggestions are likely to be helpful to the exporter who wants to
protect himself against marine and related risks:

(1) Employ the most experienced and most reputable marine insurance broker who
can be found.
(ii) Take out an open or floating marine insurance policy.

(iii)Insist that the terms of the policy be made as broad as possible 1 not only from the
point of view of the types of merchandise to be shipped but also in respect of the
areas covered, the elapsed time and other provisions.

(iv) In the case of 1oss~

(a) Notify your broker;

(b) Do it immediately; and
(c) Move without delay. The collection of an insurance loss may be vitiated by
postponement.
(v) Marine insurance never covers what is known as “inherent vice”, which means
deterioration such as spoilage due to the character of the merchandise.

(vi) See to it that all the insured goods are moved promptly. They must not be
allowed to remain on docks, in trucks, or in unprotected places.
(vii) Invariably add at least 10 per to the invoice price of the merchandise —
sometimes more.
(vii) If the total risk exceeds the amount of insurance named in the policy, the limit
should be immediately increased

Marine insurance companies and underwriting organizations are keenly interested

in export packing methods and make recommendations based on their experience. One of
the basic factors considered by an underwriter in quoting a marine insurance premium is
the loss experience of the shipper. This is a tangible measure of the packing problems of
every shipper and offers a reward to effect improvements in the loss and damage record.

Marine insurance to cover cargo risks is commonly place On all shipments

moving in international seaborne trade. The insurance may be placed for the exporter’s
account or for the account of the buyer, or it may be placed by the importer who has
selected a particular underwriter. This is not as simple as it may sound. For example, the
importer may agree to take care of the insurance. In this case, let us say that the purchase
is made under a letter of credit. The letter calls for furnishing an on-board bill of lading in
order to collect under the credit. if a loss should occur between the time the goods leave
the exporter’s warehouse and before the on-board bill of lading is issued, the credit could
not be used and the insurance taken out by the importer probably would not cover the
loss.

There are certain advantages to the exporter who takes marine insurance. For example,
when the sale is FOB vessel Bombay, the importer’s insurance may become effective
only when the goods are loaded aboard ship; hence, any loss to the shipment between the
exporter’s warehouse and the vessel may not be covered. To protect against such a risk,
the exporter would need to purchase an inland marine policy or a special endorsement for
an open cargo policy.

Types of Risk

Marine insurance differs from many other forms of insurance in that the insured
has a choice of a. vast variety of risks against which insurance can be effected. In broad
categories, the risks that are commonly insured against are:

(1) Free of damage insurance. This is a very limited form of insurance and covers
only total loss of the goods; partial losses are not covered.
(2) Fire and sea perils. Under this coverage, FPA (Free of Particular Average)
insurance, claims are paid only in case the vessel is standard, sulik, burned, on
fire, or in collision.

(3) Named perils. This includes the fire and sea perils as explained directly above,
and a number of additional perils may be added, such as fresh water damage,
hook damage, fuel oil damage, theft, pilferage, nondelivery, or breakage.

(4) All risk insurance. This is the most complete coverage commonly written, but it
is confined to losses from physical loss or damage from any external cause,
exclusive of war, strikes, and riots. This coverage does not include loss due to
the inherent nature of the goods, nor does it cover market losses due to delays in
shipment, for example, missing the Diwali sales season. If insurance is desired
to cover excluded perils, under certain very limited circumstances they can be
included in the insurance policy by endorsement, except for war risk insurance,
which requires a separate policy.

All of these coverages include general average and salvage charges. Marine
insurance is one of the few kinds of insurance where it is permissible, in addition to
insuring the value of the goods themselves, to insure profit. While the sales price of
goods usually includes the exporter’s profit, it does not include import duties or the
importer’s anticipated profit. In practice a common rule is to insure for an amount equal
to all known costs plus 10 percent.

Loss Covered Under Marine Policies

Basically, there are two types of losses under marine insurance policies: (1)
particular average and (2) general average.
Particular Average. Damage to the goods themselves is known as particular
average and may be classified as follows:

(1) Total loss. The amount stated in the insurance policy is paid.

(2) Total loss of part of a shipment, for example, by theft or pilferage. The policy
pays the insured value of the past lost.
(3) Repairable loss. The fender of an automobile is crumpled; it is repaired in the
country of importation. Loss paid is the amount of the repair bill.
(4) Replaceable loss. The fender must be replaced by a new one which must be
shipped by the exporter. Loss paid is the total Cost of a new fender, packing,
freight, etc.
In all of these situations, the limit of liability, of course, is the face amount of the
insurance policy.
General Average. Loss or damage common to the entire venture is known as
general average. If a voluntary sacrifice is made in face of impending disaster, and that
sacrifice is successful in preserving at least a part of the common venture, then all who
survive (ship and cargo) contribute pro rata in accordance with the value saved in order to
make up the value of whatever was sacrificed.
A classic example of general average loss is by jettison, or throwing overboard
certain cargo to save the ship. If 10 percent of the combined value of ship and cargo is
thus sacrificed, all owners, including the owner of the jettisoned cargo, contribute 10
percent of their respective values to reimburse for the loss of the cargo that was
jettisoned.

More common today is the case of water being used to extinguish fire. The
common sacrifice here is damage to cargo by water; carg damaged by fire or smoke is not
damaged as a result of a voluntary sacrifice and therefore is not subject to general
average adjustment.

Insurance Policies and Certificates

There are two ways that a risk can be declared to an insurance company. The first
is to send the company a copy of a certificate or a special policy, and the second is to use
a short declaration insurance form.

The certificate or special policy is prepared in the exporter’s office, in the office
of an insurance broker, in the office of the freight forwarder, or in one of the offices of
the insurance company. This certificate or special policy is necessary only when the
exporter is required to furnish evidence of insurance to some third party, such as the
bank, a customer, or a third party to whom claims, if any, are to be paid. The certificates
and special policies are both negotiable instruments and hence facilitate the settlements of
claims in the country of the consignee.

In this situation, the exporter often takes out an open insurance policy that sets
forth the risks for which there is insurance, and the special policy completely reflects the
open policy coverage. Every shipment that is made by the exporter under this open policy
is certified to the insurance company with complete descriptions, values, and all
necessary details. With this information, the insurance company is in a position to
calculate a rate. By use of an open policy, the exporter is protected on all shipments to the
extent that the exporter advises the insurance company of every transaction.

In the second way to declare risk to an insurance company, if there is not a

necessity to evidence insurance to a third party and if claims are to be paid to the exporter
only, a short declaration insurance form can be used.

If terms of sale or letters of credit call for an insurance policy, a policy must be
provided; a ‘certificate, which looks very much like, a policy, will not do. Provision can
be made to accept certificates.

Insurance Agents and Brokers

Marine insurance may be obtained from an insurance agent or insurance broker.

The agent or broker will help to select reliable marine underwriters and arrange the
amount and kind of protection that is required. Brokers and agents represent the policy
holder and help in the presentation of losses. They often use their experience, to make
suggestions that lower a firm’s losses. Since marine insurance rates are not standardized,
but are determine4j by the risk experience and judgement of the underwriter, the
reduction in losses could help justify reduced rates.

There is no proposal form for marine insurance. But for the insurance underwriter
to assess the risk, a form known as “Declaration Form” is generally used. Full particulars
should be given in the standard form suppled by the company. It is designed to include
the following essential details, and be signed by the proponent.

1. The name of the party who effects insurance or on whose behalf insurance is
effected.

2. If the payment on account of claims is desired in any foreign currency, it should

be stated accordingly.

3. Name of the steamer and voyage. For cargo normally shipped via Suez Canal but
not via Cape of Good Hope, a surcharge of premium is added by the insurance
company. Rates are applied for the vessels of less than 2000 G.R.T. Vessels
under “Flags of Convenience” like Librarian, Panamanian, Greek, etc., yield high
loss ratio, hence recovery of claim is difficult. Therefore, the insurance
underwriter charges extra premium for shipments to Greece, Panama, China,
Poland, Bulgaria and East European countries.
4. Strike, riots and civil commotion risks should be included wherever necessary.
War/SRCC rates are charged extra in accordance with the rules framed by the
 Institute of London Underwriters.
5. Description of goods and their packing details should be furnished. Sound
packing attracts lower rates.
6. Details of risks to be covered should be given-F.P.A., W.A., W.A.
Comprehensive. All Risks, and Inland Transit.

All the above types of insurance cover loss or damage, to the cargo caused by
marine perils, i.e., perils of seas, fire acts of thieves and pirates, jettison barratry, etc.
Inland transit risks are not covered, unless specifically provided for.

F.P.A.Covers
(Free of Particular Average)
The following losses are covered:
1. If the ship is stranded, sunk or burnt.
2. If packages are totally lost during loading, unloading or transhipment.
3. If the goods are damaged due to fire, collision, explosion or due to ship’s
contact with any fixed object and/or if the ship is damaged at the port of refuge.

W.A. Policy Covers

(With Particular Average)

In addition to the losses under F.P.A. policies, loss or damage to the cargo caused
by heavy weather or sea water, is also covered provided the damage reaches the
percentage of franchise specified in the policy. Percentage clause could be deleted at the
request of the insured on payment of extra charges. There are numerous non-marine
perils also which could be covered under W.A. Comprehensive or All Risks policies.

Extraneous Risks

Due to rapid growth of the international trade and as a result of progressive

curtailment of their liability by shipping companies under the terms and conditions of bill
of lading, a demand has gradually arisen for cover against many extraneous risks like:
1. T.P.N.D. (Theft, Pilferage and Non-Delivery)
2. Fresh Water or Rain Water Damage
3. Hook Damage
4. Oil Damage
5. Damage by Mud or Acid
6. Heating
7. Sweating
8. Damage by other Cargo
9. Leakage
10.Breakage

All Risks Cover

This is an all embracing cover and includes all the extraneous risks as mentioned
above, but does not include War or SRCC Risks. Loss or damage due to inherent vice, or
losses proximately caused by delay are not covered.
War and SRCC Risks

Cover is given for capture, seizure; arrest, restraint, detainment, hostilities, civil
war, revolution, civil strike or war like operations.

War risks are covered only when the cargo is water borne and for fifteen days on
land at a port of transhipment from the date of arrival of the steamer.

Inland Transit Cover

Cover is granted for rail as well as road risks against fire, collision, breakages of
bridges, derailment or accident of like nature. According to the rail tariff clause,
insurance commences with the loading of each package into the railway wagon and
terminates three days after arrival of the train at the destination or on delivery of the
goods by Railways, whichever is earlier.

Warehouse to Warehouse Cover

This cover is granted on payment of extra premium. No liability is attached to the

company in respect of goods damaged or lost while in custody of the transport carrier
unless a provisional claim is lodged with the carriers.

Tariff Rates

Some of the voyages are governed by the Tariff, i.e., (1)India to Japan ton); (2)
India to Burma; (3) Coastal Ports of India, Ceylon and Pakistan; (4) India to Persian Gulf,
Red Sea ports, Egypt, East and West Africa, Ports like Alexandria, Colombo, Free Town,
Indonesia, Pakistan, Red China, or Israel will attract more rate of premium because of the
difficult and insecure port conditions. Similarly, commodities like cement, sugar,
household goods, second hand machinery, vegetables, bricks, tiles, crockery and bullion
or jewellery attract a higher rate of premium.

Types of Policies/Covers

There are three types of policies/covers. These are discussed below:

Specific Policy

Marine insurance policy in respect of individual shipments is issued by the

insurance underwriter on application from the exporter giving details of the consignment
to be insured, risks to be covered, value for which the cover is required and the name of
the country and the currency in which claims are payable. On receipt of these details the
insurance company issues a stamped insurance policy in duplicate.

Open Cover

At the outset it should be emphasised that open cover is not a policy. It is a

contract for a period of time (usually twelve months) whereby the insurance underwriter
agrees to grant insurance during that period not exceeding the agreed limit per vessel with
a view to avoiding accumulation of liability in any one vessel or location.

Open Policy
It is cargo policy expressed in general term and effected for an amount sufficient
to cover the number of shipments. It covers all shipments of the insured until the sum
insured is exhausted. The names of the steamers may not be available when the open
policy is-effected. Therefore, the company stipulates that the shipment should be made by
first class steamer (not over 20 years old) carrying highest class in any one of the
classification societies mentioned in clause. Further the vessel should not be more than 15
years old.

CLAIMS

In case of railway claims the consignees should be advised to lodge claim on

railways within six months of the issue of railway receipt.

The following documents are necessary in case of marine claim.

1. Policy.

2. Bill of Lading.

3. Invoices.

4. Letter of Subrogation.

5. Survey Reports.

Survey Reports

The following details are necessary in the survey report:

1. Whether packing was sufficient?

2. If not, what improvement are recommended?
3. How claim could have been minimised?
4. Was there failure of insured to protect interest by not taking measures to avoid
or minimise loss or not protecting the rights of recovery from cariers/port, etc.

Lesson – 19 Management of Risk and

Export Financing

Finance and marketing are inseparable in the conduct of international business.

The relationship between the two functions permeates the entire marketing plan, reaching
into almost every marketing activity. Pricing, for example, must consider the financial
aspects of transaction if the sale is to be profitable. The credit terms may be even more
important than the price in a given transaction. Promotional expenditures and themes
must be coordinated with financial practicality. The establishment of overseas branches,
subsidiaries, and marketing channels requires both long-term expenditures and working
capital.
The large size of many international transactions, the great distances involved, the
many sovereign nations, and the limited knowledge about customers all combine to
require close co-ordination between the financial and marketing departments.
Furthemore, marketers need more than a causal knowledge of the financial considerations
in international marketing since the sources and instruments used there are different from
those used in domestic trade.
This chapter describes some of the major sources of funds for international
marketing, the principal instruments that are used and the management of risk.

Finance and Export Trade

Export financing starts after the order from the buyer has been received, the
export order has bee accepted, manufacturing for the export order begins, and the
shipping documents are issued; and it ends at ports when the goods are cleared. In other
words, export finance refers to the financing of the goods from the home port to the
foreign port and the inland centres, and remittances accruing from the sale of these goods.
Financing of exports is a specialised business demanding the operations of institutions
that are engaged in it and have special skills in handling the intricacies of foreign
exchange transactions, a network of contracts abroad and a willingness to assume the
risks peculiar to it. It follows, therefore, that good financing arrangements are a
prerequisite for the success of the export trade.

In export trade, where business dealings are carried on between parties who may
be separated by many thousand miles, it is necessary to have a clear understanding of
how and when the buyer will pay the exporter for the goods which have been ordered;
and it is up to the exporter to indicate the way in which he wants the importer to pay him,
i.e., whether he requires prompt payment or whether he is willing to allow credit to the
buyer.

An importer may often be attracted by payment terms, which allow good credit
rather than by low prices. References should be checked to ascertain whether it is safe to
allow credit. If it is safe, it is up to the exporter to decide whether he can afford to give
such credit at the prices he has calculated. He may find that he cannot afford to do this;
and yet he may also find that his inability to give credit is the only hindrance which
prevents him from doing business with certain class of good buyers abroad. The way out
may be to borrow money from a bank or any other financial institution to
finance such credit.

Basically, the export trade is financed like any other trade. The development of
the export business is, in one form or another, a capital investment, and must be paid for
by the exporter. The investment is generally made in a less tangible form than in
domestic business should not blind us to the fact that it is a capital investment and that it
cannot generally be made the object of banking credit.

Provision of the necessary funds with which to carry the merchandise from the
date of manufacture to the date of delivery should therefore be made plus the provision of
whatever credit the exporter believes should and can be extended to the buyer by the
exporter.
In the case of export trade, credits generally cover specified shipments of
merchandise and are represented by documents without which ownership of the
merchandise cannot change hands. In this respect, therefore, the extension of credit in
foreign trade is not only on a different basis but on a sounder basis than in domestic trade.

Sources of Funds for International Marketing

As might be surmised from earlier discussions of the different marketing

strategies that can be employed by the multi-national firm, there is likewise a variety of
capital requirements that must be satisfied to support these approaches. Funds are needed
by firms with foreign subsidiaries for physical facilities and for working capital to supply
inventories, credit, and operating expenses. Even when the company limits its
international activity to exporting, it needs funds for inventory, credit, and promotional
activities. These many needs are met from a variety of sources, some within the corporate
structure and some external to the firm.

Internal Sources of Funds

The multinational firm, with its subsidiary, joint venture, or other affiliate
operations abroad, may be able to raise a portion of the required funds internally. Some
of these funds may be obtained from the parent company’s operations and investments,
while others might be generated by the affiliate itself or other subsidiary operations
within the corporate structure. The parent organization is an important financial sources
as it provides equity for the subsidiary or loan funds directly to the local unit. In some
cases these loans may take the form of credit extended for inventory or equipment. The
parent organization also has the opportunity to aid its subsidiaries by guaranteeing any
loans that the affiliate negotiates with local financial sources.

External Sources of Funds

Usually the financing of international marketing requires funds in excess of those

that can be allocated from the parent company. Thus, the firm turns to outside sources of
both a private and governmental nature to meet these needs. Over the long course of
international trading history, a variety of financial institutions have evolved to aid the
firm in supporting its marketing activities. Some of these are private sources, but others
have been developed by the Indian Government and multinational sources.

Commercial Banks, Banking is one of the most important facilities for the
conduct of international as well as domestic marketing. Some of the major banks not only
evolved an extensive system of branch banks in foreign countries, but they also began to
expand the number and types of services they offered to meet the needs of the emerging
multinational firms.

The international firm can choose from a number of banking sources for its
foreign operations. Banks have developed different types of facilities to extend credit and
otherwise support the overseas operations of their customers. When the international firm
makes its choice of banks, there are several possibilities that are open:

(1) A firm may choose to do its banking through the international department of its
local bank. This bank may carry out its functions through correspondent banks
 abroad or it may have its own subsidiaries or branches abroad;
(2) Alternatively, the firm may choose to route certain transactions, perhaps at the
request of its customers, through banks in the foreign markets; and
(3) One additional possibility that has emerged in recent years is to work with one
of the consortiums formed by banks of several nations.
Each of these has special advantages for certain situations and companies.

The World Bank Group, This group of three financial institutions is especially
important for the financing of projects in developing countries that are related to
infrastructure.
(i) The International Bank for Reconstruction and Development. The IBRD is the
central institution of the group. Founded in 1946, its functions are:

(1) To assist in the reconstruction and development of its member countries by

facilitating the investment of capital for productive purposes, and thereby
promote the long-range growth of international trade and the improvement of
standards of living;
(2) To make loans for productive purposes out of its own funds when private capital
is not available on reasonable terms; and
(3) To promote private foreign investment by guarantees, and participation in loans
and investments made by private investors.

The bank makes loans on conventional terms for basic development projects
chiefly to governmental bodies in the borrowing countries or for government guaranteed
loans to private interests.

(ii) The International Finance Corporation (IFC). This organization was formed in
1956 to assist in the economic development of its member countries by promoting the
growth of the private sector of their economies. The corporation is to supplement and
assist the investment of private capital and not to compete with it. It is a development
agency that is to finance only enterprises which are productive in the sense of
contributing to the development of the economies of the member countries in which they
operate.

(iii) The International Development Association (IDA). The third member of the World
Bank group, IDA, has the primary objective of creating a supplementary source of
development capital for countries whose balance of payment prospects would not justify
their incurring external debt on conventional terms. IDA credits arc repayable in foreign
exchange, but on very lenient terms. A government entity is usually the borrower. Credits
may be repayable over a period of 50 years, including a grace period of 10 years.
Compared with conventional loans, these terms substantially alleviate the repayment
problems of the borrowing countries and bear less heavily on balance of payments.

Regional Development Banks, Various regional development banks have been

established to promote the development of underdeveloped areas through the provision of
intermediate and long-term loans. Other development banks which have been established
including regional banks such as the Asian Development Bank, the African Development
Bank, and national development banks such as the National Financier South American of
Mexico.
International Commercial Payments

International commercial payments may be broadly grouped into the following

categories: (1) cash, (2) open accounts, (3) bills of exchange, and (4) letters of credit.

Cash
Cash is both a method of payment and a term of payment, but as a method of
payment it is rarely used in international marketing. As a method of payment, the
international marketing firm may use cheques like domestic trade. If accounts are
maintained in banks in various countries, cheques may be drawn and paid in a variety of
currencies. Or cash may be remitted by means of an international money order for small
amounts.

Banks in India have deposit accounts abroad, and foreign banks have deposit
accounts in Indian banks. Funds may be paid from any of these accounts for purposes of
financing trade, yet an exporter in India receives rupees for the merchandise that is sold,
regardless of whether the price was stated in Indian rupees or in some other currency. If,
for example, the price was stated in Italian lira, then the Indian bank’s lira account in
Italy is increased and the Italian bank’s rupee account in the Indian bank is reduced. The
conversion of the lira into Indian rupees is a foreign exchange transaction taken care of
by banks. Of course, exporters can accept foreign currencies in payments but they usually
do not care to do so.

Cash is also a term of payment. Cash may be called for with the order, or against
certificates of manufacture as work on a complicated piece of equipment progresses.
Today credit is increasingly demanded. Cash payment is not attractive to buyers since
they bear the entire burden of financing the shipment. The buyer loses the use of funds
for a considerable time before the goods are received, incurring a loss in the use of
working capital as well as loss of interest. There may also be resentment of the view that
the buyer is unworthy of credit. Furthermore, the buyer is dependent upon the honesty,
solvency, and promptness of the exporter in the business deal. Today cash payment will
probably be used when the importer is of doubtful credit standing, when the exporter is
financially weak, on orders requiring special instructions,, or when the exporter is not
cognizant of the competitive situation faced by manufacturers of other countries.

Open Account

The open account method of payment for export shipments is the opposite of the
cash method. Under the open account, goods are shipped without documents calling for
payment — the commercial invoice of the exporter indicating the liability. Since no
documentary evidence of ownership or obligation exists, the open account presents
difficulties because of differences in the laws and customs of countries which make it
difficult to safeguard the interests of the exporter. In the open account method, the burden
of financing rests upon the exporter. This requires a greater amount of working capital
than other forms of payment and the exchange risks are assumed by the exporter. Despite
the disadvantages of the open account, competitive pressures have forced many producers
use this method after years of selling on more secure terms. The Indian government has
recognized the competitive advantage of this form of credit in the system of credit
guarantees, it has established to aid Indian producers in competing with their European
and American counterparts.
Channels for Financing

These channels are:

(i) By the Exporter Himself. This method is most unusual because comparatively
few manufacturers and professional exporters eithers have sufficient capital or wish to
employ their capital in this manner. Even if manufacturers and exporters have ample
capital, it is to be doubted whether this is the wisest policy to employ it in this manner.
Not only are the interest rates charged by banks comparatively low, not only are the fees
for negotiating drafts usually quite small, but in refusing to use the facilities offered by
banks, the manufacturer or exporter deprives himself of constant contact with a source of
information covering a wide range of countries and subjects which may be of importance
to him in deciding whether or not to extend credit in some particular instance.

(ii) By the Export Middleman. The export middleman, particularly the export
merchant or export commission house, finances export shipments. The manufacturer may
have his shipments to overseas markets financed by paying the export middlemen a fee.
The fee usually charged by a middleman for services of this nature is comparatively high.
Credit risks which are not ordinarily acceptable to banks naturally gravitate towards this
type of financing. Usually, the middleman turns around and refinances his own drafts
through a bank. The manufacturer, therefore, is paying the middleman a profit for the use
of his credit. If the manufacturer is able to present a reasonably sound financial position
to a bank, there seems to be every reason why he should finance his export business
direct, provided that he is qualified by experience and training to judge the credit risks
involved in the export trade.

(iii) By Banks. The financing of export shipments is usually done through the
discount of documentary drafts by banks.

(iv) By importers. When the exporter insists upon letters of credit or cash in
advance with the order, he is virtually asking the importer, in the overseas market to
finance the transaction. The importer does this either by placing the actual cash in the
hands of the exporter or by establishing a letter of credit with some bank. In either case,
the effect is the same — the importer has financed the transaction.

(v).By Factors. This method is useful to those exporters whose working capital is
limited. The factor is a combination of mercantile and banking house which finances
manufacturers, exporters, commission houses and selling agents through the purchase and
discount of receivables created by sales of merchandise. They are documentary drafts and
transactions related to Letters of Credit. Charges for factoring export transactions are
generally assessed on a percentage basis. But because little or no cash is required, this
type of financing is attractive to many manufacturers and exporters.

Terms of Credit

The terms of credit are contractual matters of prior arrangements between buyer
and seller, and their determination depends upon a number of such factors as the type of
merchandise to be shipped, the availability of the merchandise, the amount involved, the
market customs, the credit standing of the buyer, the country in which the consignee is
located, the exchange restrictions existing in that country, the amount due from the buyer
at the time the shipment is made, the availability of feight space to the country of
destination, whether the account is a new one or an old one, and many other
considerations.

The terms of sale should be carefully distinguished from the closely related ‘terms
of credits’. The terms of sale are the conditions of content, time, place and delivery of the
merchandise, and only indirectly affect the extension of credit or the length of time for
which credit is allowed. The terms of credit are the expression of the extent of trust, the
seller (exporter) is willing to place in the buyer.

TERMS OF CREDIT IN EXPORT TRADE

(i) Consignment. This method is probably used in the export trade, possibly
because export transactions are always wholesale transactions. In the end,
payment is frequently made by means of a clean draft, that is, a draft without
any documents attached, and, therefore, a draft which the buyer may honour or
not as he sees fit.

(ii) Open Account. It may be liquidated by means of a clean draft.

(iii) Sight Draft. This refers to documents against acceptance (D/A). In this case,
credit is extended on the basis of the buyer’s “acceptance” of a draft calling for
payment within a specified time.

(a) This specified time may be expressed as a certain number of days after sight,
that is, after the draft is first presented to the consignee.

(b) This specified time may be expressed as so many days after the date on
which the draft is drawn. Date drafts are preferable because they indicate a
definite date for their maturity.

(c) Generally, the drawee is permitted to examine the merchandise before he

accepts the draft; but in some cases this is not allowed.

(iv) Letter of Credit. Payment is made against the documents surrendered to

the named bank. The buyer arranges for the establishment of a Letter of Credit
through his local bank and specifies the conditions under which payment may be
made to the seller. Upon the arrival of the credit, the Indian bank notifies the
Indian exporter that the credit is at his disposal, and upon what terms. To secure
payment, the exporter in India simply presents the necessary or specified
documents covering the shipment to the notifying bank, either directly or
through his own bank in India. If the documents are in order, they are accepted
by the bank, and the exporter receives the payment in full. As far as the exporter
is concerned, the transaction is closed. Great care, however, must be taken by the
Indian shipper to comply with all the conditions set forth in the original Letter of
Credit. Even experienced exporters occasionally get into difficulties by
overlooking some item.

(v) COD (Cash on Delivery). This may be worked out in one of the several ways:
(a) Cash against documents at the point of shipment (usually at the port of
shipment). This involves advance payment. The goods are not released for
 shipment until the buyer pays for them. Part payment may be made in
advance and part payment against documents.
(b) Cash against documents at destination: (sight draft) The goods are shipped
without prepayment but the buyer must take up the draft and pay the face
amount of it upon presentation.
c) Document against payment: (time draft) The goods are shipped without pre-
payment, with a draft calling for payment within thirty, sixty, ninety or one
hundred and twenty days from the date or sight. On arrival, the merchandise
is placed in a warehouse. Payment may be made at any time within the
period specified in the draft, at which time the buyer may take possession of
his goods. Partial deliveries, against proportionate payments, can usually be
arranged under this method.
(vi) Cash with Order (CWO). Although once a practically unknown procedure, due
to difficulties currently encountered by foreign importers in securing
merchandise, this may now be a practice which is used at times. it may be
accomplished either by actual remittance of cash by a bank draft, or by a cheque
on an account in India, or by an available letter of credit.

It should be emphasised that the terms of sale virtually represent a contract

between the buyer and the seller and include the “terms of credit”. “Terms of sale”, when
once agreed upon between buyer and seller, should include every condition on which the
sale has been made.

INSTRUMENTS USED IN FINANCING EXPORT TRADE

(1) Letters of Credit

Letters of credit are the most important single factor in the export trade. They
form the basis of a very large portion of world trade, and give security to both buyer and
seller. Letters of credit are much more than a means of arranging payment between the
two parties to a transaction; they also set out the ways in which the contract between the
two parties is to be performed.

A letter of credit has been defined as a written instrument issued by the buyer’s
bank, authorising the seller to draw in accordance with certain terms, and stipulating in a
legal form that all such bills shall be honoured. Letters of credit are also known as
commercial credits and banker’s credits.

The terms of letters of credit vary greatly, because alterations are made to suit the
requirements of each individual transaction. All such credits, however, have certain
characteristics in common; all contain an authorisation for some seller of goods to draw
on a bank which promises to honour the drafts, although in the case of revocable credits,
this promise is contingent upon the cancellation of the letter of credit or its not having
been received. The bank thus places the security of its name behind the buyer. In the case
of irrevocable credits, this security cannot be taken away, except with the consent of the
beneficiary. Herein lies the main point of attractiveness of letters of credit from the
exporter’s point of view — he is assured of obtaining payment for his goods, provided
that he lives to the terms specified therein. On the other hand, the buyer, provided that he
is able to satisfy his local bank as to his standing and the legitimacy of his requirements,
can have his orders accepted by almost any firm in any country of the world.

It may be pointed out here that the bank issuing the letter of credit is the stake-
holder in the transaction and is acting on behalf of the buyer who opens the credit. It is
not a party to, and knows nothing about, the negotiations between the parties, and is not
interested in the goods as such. In issuing a letter of credit, the bank is acting in
accordance with the instructions which have been given to it by the buyer. The bank is
not in a position to modify any of the details contained in the credit, whatever the reasons
given by the exporter. This position must be clearly understood before describing the
usual letter of credit requirements. Every little detail must be complied with by the
exporter to enable him to obtain payment against the letter of credit and one small (and
often apparently senseless) divergence will lead to considerable complications, entailing
extra expense delay in payment, or non-payment and, probably also, offence to the buyer
who opened the credit. The letter or credit must be minutely studied by the exporter; and
if there are any details, however small, which call for adjustment, the exporter must ask
the buyer to amend his instructions to the bank and the exporter must wait until the bank,
which issued the credit to him, notifies him that the letter of credit has been amended as
required. The amendments must follow the same channel as the original credit; it is no
use for the exporter to ask the bank at his end to make the amendments. The form and
actual wording of a letter of credit vary from bank to bank; but the basic contents are the
same.

It is a frequent practice among exporters to request their foreign buyers to arrange

with their local banks for the establishment of credits through a designated preferred bank
in India. Commercial letters of credit used in connection with exports fall into the
following three principal categories.

(1) An irrevocable letter of credit (L/C) issued by a foreign bank and confirmed or
guaranteed by an Indian bank. This type of letter of credit is referred was a
“confirmed irrevocable letter of credit”, and becomes the irrevocable obligation
of the Confirming Indian bank.
(ii) An irrevocable letter of credit issued by a foreign bank but without the
responsibility of an Indian bank. It simply transmits advice of the issuance of the
letter of credit. This is called an “unconfirmed irrevocable letter of credit”.

TYPES OF LETI’ERS OF CREDIT

In accordance with their terms, letters of credit may be classified as:

(i) Clean and Documentary Letters of Credit

Letters of credit may be either clean or documentary.

A clean letter of credit is one in which payment is made to the beneficiary against
his receipt or against his clean draft. Most commercial letters of credit are documentary,
the payment being made by the notifying bank against the beneficiary’s draft
accompanied by the delivery of the full set of documents called for by the terms of the
letter of credit.

(ii) Revocable and Irrevocable Letters of Credit

It is obvious from the above classification of letters of credit that they may be
either revocable or irrevocable.

Irrevocable letters of credit may be either confirmed or unconfirmed. A confirmed

letter of credit is one which is the irrecovable engagement of the issuing bank and which
has been guaranteed to the beneficiary by another bank. The Indian bank gives its
undertaking that drafts drawn in accordance with the terms of the letter of credit will be
duly honoured. For confirming a credit, the confirming bank charges a commission; for
that reason, confirmation is usually avoided unless it is necessary or desirable. It would
be necessary, for example, when the bank establishing the credit is practically unknown
in the beneficiary’s country; in such a case, confirmation of the credit by a local bank
would enable the beneficiary to negotiate drafts drawn under it much more readily.

Revocable letters of credit are obviously never confirmed, since confirmation

would render them irrevocable so far as the confirming bank is concerned.

It should not be assumed that revocable credits carry no obligation on the part of
the bank which establishes them. The bank cannot cancel transactions, under revocable
letters of credit, after they take place — that is, after the drafts are negotiated.

Revocable credits are invariably addressed to a bank and not to the beneficiary.
Under some circumstances, the exporter may be satisfied and accept the irrevocable letter
of credit of a foreign bank without confirmation by an Indian bank. This form may
provide for drafts dawn on the Indian bank; but in either case, the Indian bank has no
obligation to honour the drafts. The revocable letter of credit is less frequently used than
the irrevocable letter of credit. The revocable form serves only as a means of arranging
payment. for it affords the exporter no protection prior to payment and may be amended
or cancelled without the consent of the beneficiary and without placing him on notice of
changes or cancellations. As a matter of courtesy, however, banks generally notify
beneficiaries of changes or cancellations; but there is no obligation on their part to do so.

(iii) Assignable and Non-Assignable Letters of Credit

Letters of credit may also be divided into two groups, depending upon their assign
ability. An assignable letter of credit is one which may be assigned by the beneficiary to
some other party. A non assignable letter of credit is one which may not be transferred by
the beneficiary named in the letter of credit. An assignable letter of credit is usually
issued to a representative of the importer whom he does not know at the time he requests
the letter of credit who will actually be the exporter of the merchandise. Once the
representative of the importer has found a suitable person or firm which is able and
willing to ship the goods on the terms specified by the importer, the letter of credit will be
assigned to that party, who’ becomes the exporter, ships the merchandise, and collects
under the terms of the letter of credit which has been assigned to him.

(iv) Revolving Letters of Credit

A revolving letter of credit was devised to meet the needs of firms in different
countries whose business transactions with one another were more or less regular and
continuous, at least over a certain period of time. A firm in Iraq, for example, which
expects to buy a substantial quantity of fertilizers in India over a period of 4 or 5 months,
may not find it convenient to establish a separate letter of credit covering each
transaction. It can, however, arrange with a bank in Baghdad to establish a letter of credit
with a bank in New Delhi to be availed of against sight documentary drafts, with the
provision that not more than $ 100,000 is outstanding at one time. Two common types of
revolving letters of credit are:

(a) Revolving Cumulative Letters of Credit. A letter of credit which indicates the
maximum amount of drafts which may be outstanding at any time. When once
this maximum is reached, the paying bank may negotiate fresh bills only to the
extent that those previously negotiated have been paid, and advise to that effect
received from the bank which established the credit.

(b) Revolving Non-Cumulative Letters of Credit. A credit which provides for a

certain maximum payment in any one month (or some other period of time). It is
a normal precaution in establishing such credits to indicate that if the credit is
not drawn against during one month (or the period of time specified), the
amount not availed of cannot be availed of subsequently.

(v) Foreign Currency Letters of Credit

Letters of credit may specify the currency in which drafts against them shall be
drawn. The currency specified depends on the arrangements made between the seller and
the buyer at the time the sale is effected, and these arrangements vary according to the
countries in which the seller and the buyer are located.

(vi) Cable Credits

Under arrangement, these letters of credit are opened by cable.

(vii) Ancillary Letters of Credit (Back to Back Letter of Credit)

These assisting letters of credit are based on the original letters of credit.

Suppose our exporter in India has received a letter of credit for the shipment of sports
goods. The exporter has no funds and no line of credit with a bank, and consequently is
unable to buy the sports goods ordered by the importer. He, therefore, requests the bank,
which has notified him, of the letter of credit to open its own letter of credit to a third
party (the seller of sports goods) under the identical terms contained in the importer’s
letter of credit. If the importer’s letter of credit is irrevocable, the bank may issue its own
letter of credit (ancillary letter of credit), honour the drafts of the seller (the owner of the
sports goods) on receipt of the shipping documents and cancel the ancillary letter of
credit The exporter presents his draft for the amount of the original letter of credit, but
receives only the difference between the amount of the draft and the amount paid by the
bank on the draft drawn under the ancillary letter of credit.

Discrepancies

The discrepancies most frequently found in documents scrutiniscd by the paying

bank are:
(1) The letter of credit has expired, or the tune of shipment specified in the letter of
credit has expired.
(ii) The invoice of the draft exceeds the maximum amount specified in the letter of
credit.
(iii) The charges included in the invoice are not authorised in the letter of credit.
 (iv) The insurance coverage supplied by the consignor is not complete, either as to
amount or as to the risks covered.
(v) The date of the insurance certificate is later than the date indicated on the bill of
lading.
(vi) The bill of lading is riot “clean”.
(vii) The bill of lading does nor include the “on board” endorsement, or changes on
the bill of lading have not been signed by the shipping company or have not
been initialled by the same party who signed the bill of lading.
(viii) The bill of lading is made out to “order” whereas the credit stipulates a
“straight” bill of lading, or vice versa. Bills of lading to some countries are
prohibited and heavy penalties or additiona1 duties are imposed for failure to
ship on a straight bill of lading.
(ix) Description marks and numbers of the packages are not exactly the same on all
documents presented, or as called for in the letter of credit.
(x) All the documents required under the letter of credit have not been presented.
(xi) The invoice does not set forth the terms of shipment as stipulated in the letter of
credit, such as C & F, CIF, FOB, FAS, etc.
(xii) Documents are “stale dated”, i.e., not presented to the opening bank promptly
after date of their issuance. –
(xiii) The bill of lading does not indicate “freight prepaid,” when freight charges are
included in the invoice.

It is difficult to exaggerate the importance of carrying out all these stipulations to

the last detail. The bank must thoroughly satisfy itself as to the accuracy and
completeness of the documents attached to the drafts presented for discounting. Once the
drafts under a letter of credit have been accepted or paid, the bank is committed. If an
error has been made, the party for whom the credit was originally established is not
considered to be liable in any way and cannot be forced to take up the drafts so accepted
or paid by the bank.

The bank negotiating, accepting and paying the drafts under a letter of credit
covering shipments of, merchandise is not responsible for the quantity or quality of the
merchandise. The buyer must be satisfied as to the integrity of the exporter before he
closes the transaction. But the bank is entirely responsible for the fulfilment of the
conditions Specified in the letter of credit itself.

Main Parties to a Letter of Credit

There are four main parties to a ‘letter of credit. They are:

(i) The importer or buyer on whose account the letter of credit has been opened

(ii) The seller or beneficiary who is authonsed to draw against it.

(iii) The bank which opens or establishes the credit, called the “issuing bank”.

(iv) The paying or accepting bank, frequently called the “advising” or “notifying”
bank, on which the beneficiary is authonsed to draw.
 A third bank may become a party to this transaction when, under an irrevocable
letter of credit, the beneficiary chooses to present his drafts, drawn against the letter of
credit, for negotiation to a bank other than the notifying bank.

When opening a letter of credit, it is necessary to state:

(i) Whether the letter of credit is revocable or irrevocable, and whether confirmed
or unconfirmed.

(ii) The name of the beneficiary.

(iii) The person on whose account the credit has been opened.

(iv) The tenor of the drafts to be drawn.

(v) Description of the goods.

(vi) How goods are to be consigned and bills of lading drawn.

(vii) Details of documents required and the disposition to be made of them.

(viii) Where and how insurance is to be placed and to whose order it is payable.

(ix) Expiry date.

(x) The number of the letters of credit and instructions that bills drawn under it shall
bear the clause “Drawn under (the name of the issuing bank) Letter of Credit No
…..”

(B) Drafts or Bills of Exchange

A draft or a bill of exchange, as it is known throughout the world, is an

unconditional order in writing, addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or
determinable future time, a definite sum in money to, or to the order of, a specified
person or the bearer.
An accepted draft or an accepted bill of exchange is called an acceptance. The
person to whom it is addressed is called the drawee, and if he signifies his assent to the
order in due form, he is called the acceptor. Such assent usually consists of the acceptor
writing across the face of the bill, the date, “accepted payable at…….and affixing his
signature.

A draft is payable to the bearer when it is expressed to be so payable or when the

only or last endorsement is an endorsement in blank. This endorsement in blank is one in
which the name of the company only is shown, with the name of signatory and his title.
For example:

Indian Export Company, B.S. Rathor

Finance Officer.
The form of endorsement conveys title to the bearer.
A special or direct endorsement would read as follows:

Pay to the order of Joe Macanzie & Co.

Indian Export Co.
B.S. Rathor
Finance Office

The sum payable is a definite and specified sum, although it is required to be paid
with interest or with collection charges, or according to an indicated ascertainable rate of
exchange.

No special form of words is essential for the validity of a draft, provided that the
sense is clear and the bill conforms to the provisions laid down in the definitions given
above.

Drafts are usually drawn in pairs, one of which is the “first of exchange” and the
other the “second of exchange”. It is customary to send the first of exchange by the first
mail and to send the second of exchange by a subsequent mail. If the first of exchange is
lost, the second of exchange then becomes negotiable. However, if the first of exchange
is negotiated, the second of exchange ceases to have any value.

It is drafts or bills of exchange, drawn by the shipper of goods or the provider of

services in one country, on people in another country who are buying the goods or using
the services, that constitute the chief supply of international currency.

A draft or a bill of exchange performs two or three functions. A draft payable at

first sight is a demand for payment due and a receipt for payment made. A draft payable
at some future period after sight becomes a demand for payment by the seller, a promise
of payment by the buyer on the agreed date, and a receipt for payment after such payment
has been made.

The person who makes out the draft (i.e., the person who receives the money) is
said to draw the draft and is called the drawer. The person to whom the draft is addressed
and from whom payment is demanded is called the drawee. When the drawer expects the
drawee to make payment immediately, the draft is presented to him and this draft is
called a “sight draft” which is said to be “drawn at first sight” or “on demand” or on
presentation.” In its Strict technical meaning, a sight draft should be retired or honoured
(meaning thereby the payment demanded should be made) by the drawee immediately
when it is presented to him; but in export trade, most drawees wait until the vessel
carrying the goods arrives at the port of destination before doing so.

The bank in the buyer’s country normally receives a sight draft and the shipping
documents which accompany it sometimes before the goods arrive, as these documents
are sent by air mail; but whilst the bank will notify the buyer that the documents have
been received and are due for payment, it will not take any further action to obtain
payment until it knows that the vessel has arrived. This notification to the buyer that the
draft is with the bank awaiting payment is called presentation; and when the buyer pays
the draft, the bank will hand over the shipping documents (i.e., the bill of lading,
invoices, insurance certificates, etc.) to him. The buyer is then said to have taken up the
documents.
 Unless and until the sight draft has been returned, the bank will not hand over the
shipping documents and the buyer cannot, therefore, obtain the goods which can only be
released by the shipping company in exchange for one of the copies of the bill of lading.
If the exporter has been paid through a letter of credit, the bank making the payment will
own the goods if the drawee does not pay. If the exporter has agreed to send the goods
abroad on D/P terms (documents against payment terms) without asking for credit to be
opened, the goods will remain the exporter’s property until the drawee has paid.

When the draft is drawn for payment at any date later than the presentation, it is
called a usance draft or a usance bill. When the exporter has agreed to give credit to the
foreign buyer for a certain number of days or weeks, the exporter will draw such a usance
draft on the buyer. Similarly, the buyer may be able to arrange with his bank to advance
the money for the goods and to pay the bank back, sometimes after he has received the
goods. In this case, the bank will open a letter of credit and arrange to pay the seller, but
will require the seller to submit drafts at 30 days’ sight or 60 days’ sight or after the
number of days they have arranged to allow credit to the buyer. The period which is
allowed between presentation and payment is referred to as tenor of the draft. When a
draft is drawn at 30 days’ sight, it means that the drawee has to retire it thirty days after it
has first been presented to him. What in fact happens is that, as soon as the draft is
received by the bank abroad, it will be handed over to the drawee, who will then write
upon the word draft accepted with the date and his signature. The actual wording will, in
all likelihood, be: “Accepted payable at and in the blank space will be inserted the
name of the drawee’s own bank, thereby converting the draft into a post-dated cheque.

As soon as the bank abroad receives the accepted draft from the drawee, it will
hand over the shipping documents to him and this is the explanation of the term, “D/A or
documents against acceptance”. When the exporter has already been paid under letter of
credit, the bank abroad will recover the payment after 30 days, or whether other tenor is
allowed, have elapsed from the date on which the drawee signed this acceptance.

If there is no letter of credit, the bank aboard will notify the exporter that his draft
has been accepted and give the date of acceptance, unless instructions have been given to
the contrary that the bank should hold the accepted draft as agent for the exporter and
recover payment from the drawee after the appropriate number of days has expired. The
bank will then remit the money to the exporter after deducting its own charges.

While it is usual for usance drafts to be presented and accepted immediately they arrive
abroad, there are some cases where buyers will not sign their acceptance until the vessel
carrying the goods has arrived at their port. As the documents are sent by airmail and
reach the foreign bank within three or four days, the goods many take four or five weeks
to reach the foreign port. The acceptance of a draft only on the arrival of the vessel will,
therefore, give the buyer credit for another four to five weeks.

Once the draft has been accepted, the exporter can, if he wants to get his money
quickly, discount it. If he has Sent the draft and documents direct to the foreign bank, he
can instruct that bank to send the bill back after acceptance; and when he receives it back,
he can hand it over to his own bank, or to a discounting firm, which will pay the amount
of the draft, less a Commission for discounting, which will vary according to the tenor of
the draft and the amount of risk involved in obtaining payment from the drawees when it
becomes due. In the alternative, the exporter, without asking for the draft to be sent back,
may request the foreign bank to do the discounting and remit the proceeds to him. In
actual fact, drafts are normally and preferably handed over by the exporter to his own
bank, which sends, them abroad to the bank with which they have dealings; and the bank
abroad will notify the exporter’s own bank of acceptance. in this instance, the exporter’s
bank will arrange for the discounting of the bill for him. Commercial practice, in fact,
goes a stage further; the exporter’s bank wilt normally discount the bill at the time it is
handed over to it for transmission abroad and will not wait for a notification of
acceptance. Whether the bank will do this depends largely upon how well the bank
knows the exporter and how much it trusts his commercial acumen and morality.

Such discounting of bills Costs the exporter money in bank charges, and these
charges vary and depend upon whether the draft is discounted with recourse or without
recourse. The term with recourse means that if the draft is not paid by the drawee, the
bank or discounting house can claim back the money paid to the exporter when it
discounted the draft. ‘The term without recourse means that the bank or discounting
house takes the full risk of not being able to get its money back from the drawee. Drafts
presented against a letter of credit are almost always without recourse (even though the
phrase is not mentioned on the actual draft). If with recourse drafts are asked for in a
letter of credit, the exporter is advised to obtain an amendment before taking action to
ship the goods.

In some countries, it is customary to allow the drawee three days in which to make
payment after the due date of a usance draft. These days are called grace days, and
adrawee, who has accepted a draft for payment in 60 days after sight, will in fact make
payment on the sixty-third day after the date on which it was accepted. Such grace days
are not allowable on at sight or on presentation drafts. In India, no stamp duty is required
on but usance drafts must be stamped legally acceptable. The amount of tenor of the draft
— whether it is 3 sight — but is calculated on the amount.

While it should not happen if proper care and attention is taken, there may be an
instance when the drawee does not make payment against the draft even if it is a draft
which he has signed as accepted. In such a case, the first procedure is to have the bill
noted. This means that the unpaid draft is handed over to Notary Public (who is a
specially authorised lawyer) who again presents it to the drawee (or to the bank at which
he accepted the draft as payable) for payment. If payment is not made, the Notary Public
will note the fact on the draft, giving also the reasons why payments as not been made.

After the draft has been noted, the same Notary Public will draw up a formal
document known as protest. The protest is legally necessary to enable the drawer to
enforce payment from the drawee. The bank abroad will see to it that the unpaid draft is
not noted and is unprotected if instructions to do so have been given by the exporter.

Noting and protesting can also be done if the drawee refuses to accept the bill.
The consequences then will be the same for the buyer who refuses acceptance.

In most countries there is a time limit for noting and protesting. Care must,
therefore, be taken to ensure that if such action is necessary, it is taken within the legal
period, which may be within one week or within one month after the date on which
payment should have been made.
 While the main reason for noting and protesting an unpaid or unaccepted draft is
to enable the drawer to sue the drawee or a proven debt, it often happens that the effect of
noting and protesting is to frighten the buyer (or the drawee) into honouring his
obligations because if he allows the noting and protesting to be carried out, his credit and
reputation with other possible suppliers will be badly damaged.

It is not usual for drafts and documents to be sent direct to a collecting banks
abroad. The exporter hands over the drafts and shipping documents to his own banker
and usually fills in a special form, supplied by the bank, which provides space for the
exporter’s instructions to be filled in, including space headed “if paid” and “if unpaid”
and it is in these spaces that the exporter will fill in the words protest or not protest he
wants the banks abroad to note and protest in the case of non-acceptance or non-payment.
If the word protest is filled in, the exporter will be responsible for the payment of the
noting and protesting fees, which he may not be able to recover from the drawee.
However, all this may not happen if drafts are drawn under a letter of credit.

One more fact should be borne in mind in connection with D/P and D/A terms of
payments- and that is that both the exporter’s bank to which the documents are handed
and the foreign bank which collects from the drawee will make a charge for their own
services. The charges are not excessive, but are certainly worth considering, especially
when the exporter wishes to have the money remitted by cable as soon as it is collected
from the drawee. The banks also charge extra for sending the documents by air mail. As
the actual amount of these costs is not known to the exporter before the transaction is
finalised, he may, instead of adding a calculated amount to the total of his invoice, as he
would when drawing against a letter of credit, add the words plus bankers’ collection, air
mail and remittance charges immediately following the amount of draft.

Credit Extension

One of the ever-present problems in international marketing is the extension of

credit. Whenever international marketing people assemble and the subject turns to
marketing conditions in particular countries, the question inevitably raised is: “What
terms do you grant?” The differences in the terms are often due to the products for which
the terms are cited. There is also difference in the way marketers appraise a particular
market. Therefore, it would appear that the appraisal of the credit situation of a buyer in a
particular market is determined by a number of factors. Before looking at these factors,
however, it would be well to examine closely the meaning of credit.

The Meaning of Credit

Credit usually refers to the procedure of surrendering title to merchandise without

immediate payment. In other words, credit means trusting the buyer to pay for goods after
title to them has been obtained by the buyer. Under the various credit and payment terms
described earlier, a buyer would receive credit under open account and under all draft
transactions. Under a letter of credit, the exporter (beneficiary) is assured of payment;
therefore there is no credit risk.
 There is another aspect of credit, however, that should also he considered. That is
the credit needs of the firm which is engaged in exporting merchandise, because there is
a period of time elapsing between the shipment of the order and the time that payment
is received. A payee of a draft may discount or borrow against the draft before its
maturity but in doing so, interest for the period of time for which the funds are
advanced must be paid. Moreover, there is no assurance that the draft will eventually
paid by the drawee.

The inference may easily be drawn that under all credit and payment terms except
open account, a payee (exporter) can make use of valuable documents to obtain
immediate finances, if such finances are required. However, banks will not discount or
loan against accepted drafts beyond a certain limit set by the line of credit that the bank
has set up for each individual customer. The line of credit establishes a maximum
amount that will be loaned to a customer. A limit may be placed on the rupee value of
discounting or borrowing that an exporter will be permitted to receive.

Conditions Influencing Foreign Credit Extension

There are several conditions peculiar to international marketing that require an

exporting firm to view foreign credit differently from domestic credit. These conditions
are:

(i) Supply of banking capital.

(ii) Interest rates.

(iii) Diversification of production.

(iv) Time in transit and business turnover.

(v) Exchange rate fluctuations.

(vi) Competition.

(vii) Customs.

At the outset, it is well to emphasize that the influence of these conditions varies
from country to country. While in Canada credit conditions are practically identical with
those in the United States, except for foreign exchange rates and tariffs, the conditions
influencing credit extension are different in Mexico. The supply of capital varies greatly
among countries and is highly dependent on the nation’s natural resources and past
production.

Importers located in underdeveloped areas have depended upon foreign sellers to

finance their purchases of consumer goods, transportation, automobiles, or infrastructure
improvements because local bankers were unable to provide the financing. The supply of
capital is quite meagre in these countries.

Interest rates in non-industrial areas may be substantially higher than in industrial

countries. In such circumstances, the wisdom of an importer borrowing abroad at
relatively low interest rates and lending the funds at home becomes apparent.

The lack of developed business system is another factor entering into the foreign
credit situation. In underdeveloped or developing areas of the world, intensive
specialization in commodity or functional lines may not be warranted, and the business
person may frequently combine several types of business ventures in order to earn an
adequate income. This imposes a heavy financial responsibility. Another factor
accentuating this condition is the lack of diversified production. Many countries have
only certain primary products for export such as sugar, rubber, coffee, etc. It is quite
conceivable that a crop failure or a low price could cause an economic collapse. If this
occurs, not only the growers, but also businesses, bankers, and others may be placed in
precarious positions.

Because of the length of time elapsing between the date of shipment by the
exporter and the time when goods are received by the importer, there may be a
considerable period during which, in the case of cash payment, the importer is without
both — funds and goods. If credit of sufficient duration is granted to enable the importer
to obtain the goods before making payment, the exporter bears the financial burden of the
import transaction, but the sluggishness of turnover may leave the goods in the hands of
the buyer for a considerable additional period of time, during which the buyer’s funds
would also be tied up. This condition is of little significance in domestic trade where
shipments may be made quickly, but in international marketing it presents an important
problem. It may be weeks or months before the importer located at an inland destination
receives the merchandise. Moreover, customs duties and transportation charges may be
paid before delivery. In addition, distance and time compel importers to place orders for
substantial quantities of goods long before the selling season opens

Still another condition influencing credit extension in international marketing is

the fluctuation in foreign exchange rates. Whenever a buyer receives quotations and
accepts prices in a currency other than the native currency, the buyer assumes a
speculative risk against which protection may or may not be obtained.

If the buyer has agreed to pay for the purchases by sight draft, utmost the that
payment can be postponed and possession of the goods received is upon their arrival. An
exchange loss sufficiently great to eliminate the anticipated trade profit may be incurred.

Finally, credit may also be extended for competitive reason. As a means of

promoting sales, liberal credit terms may be offered. Moreover, it may be difficult for an
exporter to refuse credit terms at least as liberal as those granted by rival suppliers.

Credit extension is influenced by the credit customs of the foreign market. Certain
terms are often established in each market along commodity lines, and they are to be
recognized by exporters selling in those markets.

Counter Trade (Barter)

Most international trade involves a cash transaction. The buyer agrees to pay the
seller in cash within a certain stated Lime period. Yet many nations today lack sufficient
hard currency to pay for their purchases from other nations. They want to offer other
items in payment, and this has led to a growing practice called countertrade.
Approximately 40 percent of trade with Communist-block nations in yesterycars was
handled through countertrade. Less developed countries are also pressing for more
counterirade agreements when they buy. Although most companies dislike countertrade
deals, they may have no choice if they want the business.

Countertrade takes following forms:

(i) Barter. Barter involves the direct exchange of goods, with no money and no
third party involved. For example, the Germany agreed to build a steel plant in
Indonesia in exchange for Indonesian oil.

(ii) Compensation deal. Here the seller receives some percentage of the payment in
cash and the rest in products. A British aircraft manufacturer sold planes to
Brazil for 70 percent cash and the rest in coffee.
(iii) Buyback arrangement. The seller sells a plant, equipment or technology to
another country and agrees to accept as partial payment products manufactured
with the equipment supplied. For example, a U.S. chemical company built a
plant for an Indian company and accepted partial payment in cash and the
remainder in chemicals to be manufactured at the plant.
(iv) Counterpurchase. The seller receives full payment in cash but agrees to spend a
substantial amount of money in that country within a stated time period. For
example, Pepsi-Cola sold its cola syrup to the USSR for rubles and agreed to buy
USSR vodka at a certain rate for sale in the United States.

More complex countertrade deals involve more than two parties. For example,
Daimler-Benz agreed to sell thirty trucks to Romania and accept in exchange 150
Romanian made jeeps, which it sold in Ecuador for bananas, which in turn it sold to a
German supermarket chain for deutsch marks.Through this circuitous transaction,
Daimler-Benz finally achieved payment in German currency. Various barter houses and
counter-trade specialists have emerged to assist the parties to these transactions.
Everyone agrees that international trade would be more efficient if carried out in cash,
but too many nations lack sufficient hard currency. Sellers have no choice but to learn the
intricacies of countertrade, which is a growing phenomenon in world trade.

Export-Import Bank of India

Objectives: The objective of Exim Bank is to promote India’s international trade.

Its logo reflects this. The Logo has a two-way significance. The import arrow is thinner
than the export arrow. It also reflects the aim of value addition to exports.

The Export-import ‘Bank of India was established for providing financial

assistance to exporters and importers, and for functioning as the principal institution for
coordinating the working of institutions engaged in financing export and import of goods
and services with a view to promoting the country’s international trade. The Exim Bank
was established under: The Export-Import Bank of India Act, 1981. The bank started its
functioning in 1982.

The Post Decades

 Net profits, on a cumulative basis over eight years reached Rs. 1.35 billion.
Reserves aggregated Rs. 989 million. Paid-up capital of the Bank increased to Rs. 2.34
billion, with the authoriscd capital at Rs. 5 billion. Asset footings recorded Rs. 17.24
billion. Dividend to Government in cumulative terms, amounted to Rs. 360 million.
Over the eight years, export contracts valued of Rs. 48 billion have been financed.
Aggregate loans and advances outstanding reached Rs. 11.18 billion. Total staff of the
Bank stands at 138.

Resources

Exim Bank’s resources as a March 31, 199Q aggregated Rs. 17.2 billion. This
includes paid up capital of Rs. 2.3 billion, wholly subscribed by the Government of
India and accumulated reserves, over a period of eight years, of Rs. 989 million, Rupee
borrowings including long term loans of Rs. 671 million from the Government of
India, Rs. 6.3 billion from the Reserve Bank of India (RBI) and Rs. 338 million
payable to the Industrial Development Bank of India, on account of its transfer of the
international loan portfolio to Exim Bank in March 1982. Rs. 3.2 billion raised in the
domestic bond market and equivalent of Rs. 1.4 billion raised as loans in foreign
currencies. The authorised share capital of the Bank is Rs. 5 billion.

Finance for exports is needed at five stages

(1) First, an exporter may need finance to develop an exportable product.

(2) Second, finance is needed to upgrade export production through acquisition of new
equipments, ongoing technology.

(3) Third, pre-shipment finance is needed to acquire inputs that get convened into an
export product.

(4) Fourth finance may be needed for systematic marketing activities.

(5) Fifth, buyers abroad may need credit terms to stimulate purchase. Exim Bank is
helping at all five stages. In the financing of non-traditional exports, exim Bank
serves as a single source for export finance.

Range of Financing Programmes

Exim Bank promotes Indian exports through a range and a variety of lending
programmes. This encompasses direct financial assistance to exporters at preshipment
stage, term finance for 100% export oriented units, overseas investment finance, a
lending programme fore export product development, term finance for export production,
finance for computer software exports, finance for export marketing, buyer’s credit, lines
of credit, export bills rediscounting, refinance and bulk import finance to commercial
banks. Exim Bank also extends non-funded facility to Indian exporters in the form of
guarantees. The Bank now offers a diversified range of lending programmes. These cover
various stages of the export cycle. i.e., research and product development, pre-shipment
finance, market entry financing term loans for capacity upgradation, production loans,
post shipment credit. The current focus of the Bank is to promote export of industrial
durables, project exports, export of technology services, export of computer software.
These together constitute the expanding base of non-traditional exports from India.

Operations under Programmes of Funded Assistance

During the period 1989-90 Exim Bank sanctioned Rs. 9.6 billion under various
programmes of funded assistance and utilisations of these programmes amounted to Rs.
8.9 billion. Compared with previous year, sanctions have increased by 12% and
utilisations have increased by 22. Outstanding as on March 31, 1990 stood at Rs. 11.2
billion compared with the previous year, outstandings have increased by 20%.

Out of sanctions for funded assistance during the period under report, the largest share
was for exports to West Asia (61%), followed by Europe (12%), South Asia (9%), South
East Asia/Far East Asia & Pacific (7%) and Sub-Saharan Africa (4%). Funded assistance
was utilised mainly for exports to West Asia (61%) followed by South Asia (11%), Sub-
Saharan Mrica (10%) and Americas (8%). Seventeen percent of funded sanctions and
25% utilisàtion of export credits were accounted for by construction and consultancy
industry. Sanctions and utilisations covered exports of railway rolling stock, textile
machinery, commercial vehicles, auto ancillaries, bicycles and spares, computer software,
pharmaceuticals, power generation and distribution equipment, surgical instruments,
telecommunications, leather and leather goods and paper mill machinery. Operations
under individual programmes of funded assistance are briefly described in the following
paragraphs.

1. Lending Programmes for Indian Companies

(a) Direct Financial Assistance to Exporters

During the period 1989-90, sanctions and utilisations of direct financial assistance
to exporters amounted to Rs. 1553 million and Rs. 1235 million respectively. Direct
assistance to exporters took the form of deferred payment, suppliers’ credit, foreign
currency and rupees term loans to project exporters and finance for export of technology
and consultancy services. Utilisations were largely for exports to West Asia (63%), South
Asia(19%).

(b) Leading Programme for Export Product Development

Exim Bank introduced in 1988-89 a lending programme which provided export

development loans for purpose of R&D, export product development and quality
assurance activities which form part of a firm’s export programme. Utilisation under this
programme during the year amounted to Rs. 4 million.

(c) Pre-shipment Credit

Pre-shipment credit is extended in participation with commercial banks for

procuring raw materials and inputs required to produce equipment whose manufacturing
cycle exceeds 180 days. During the period, preshipment credit amounting to Rs. 237
million was sanctioned. Utilisations under this programme amounted to Rs. 243 million.

(d) Term Finance for 100% Export Oriented Units

During the period 1989-90, Exim Bank extended sanctions of Rs. 307 million by
way of term loans for export oriented units. Utilisation in the same period covering
sanctions was Rs.374 million. Sanctions were utilised to set up export-oriented units for
manufacture of granite slabs, gem and jewellery, sports goods, medical equipment and
garments. Outstandings under this programme amounted to Rs. 628 million as on March
31, 1990.

(e) Term Finance For Export Production

Under the Agency Credit Line concluded by Exim Bank with International
Finance Corporation (IFC), Washington D.C., finance by way of foreign currency term
loan is available from IFC to Small and Medium Enterprises in the private sector for
investment in plant and machinery, as well as product and process know-how to create
and enhance export capabilities. Exim Bank provides rupee term loans on a matching
basis with JFC to such enterprises. Activities eligible for finance are new projects with
expansion and modernisation plans and equipment imports. Exim Bank sanctioned term
finance of USS 1 million and Rs. 22 million during the period. Utilisation under the
programme amounted to USS 3 million and Rs. 44 million. Outstandings of the end of
the year stood of USS 5 million and Rs. 80 million.

(f) Finance for Computer Software Exports

Under the Government of India Software Policy, Exim Bank has been named as a
source of foreign exchange for software exporters. Exim Bank sanctioned to software
exporters, foreign currency loans of USS 6 million and rupee term loans of Rs. 42
million. Utilisations were 1. SS 2 million and Rs. 25 million respectively. This is
expected to catalyse exports valued at Rs. 886 million over a period of 4 years.

(g) Export Marketing Fund I

Under this programme, finance is available to Indian companies for undertaking

export marketing activities. Such finance Covers upto 50% of the total cost incurred on
eligible export marketing activities. The disbursals are in the form of grants. The Export
Marketing Fund (EMF) is a component of a World Bank loan to India for promotion of a
select group of engineering export products in developed country markets. Government
of India has designated Exim Bank as the agency to manage the EMF. During the period
1989-90, Exim Bank extended sanctions amounting to Rs. 16 million to 36 firms for
export marketing programmes. Utilisations under this programme aggregated Rs. 29
million.

(ii) Export Marketing Fund II

During the year under review, Exirn Bank was designated as agency to manage a
second export development programme under World Bank funding. This programme
seeks to promote export of all manufactures to developed country markets, by providing
loan cum grant finance in support of strategic export development plans, at firm level.
Loan sanctions in respect of 2 proposals amounted to Rs. 27 million, and approval for
grant finance was extended to one company, a manufacturer of herbal products.

(i) Overseas Investment Finance

During the period 1989-90, sanctions of overseas investment finance for Indian
joint ventures abroad, amounted to Rs. 26 million. Utilizations under cumulative
sanctions amounted to Rs. 7 million. Finance extended under this lending programme
was utilised for equity investment. Under this programme, finance was utilised for
investment in a subsidiary for melamine faced particle boards in USA. Outstandings at
the end of the year stood at Rs. 30 million.

2. Lending Programmes for Foreign Governments, Companies and Financial

Institutions.

(a) Overseas Buyer’s Credit

Utilisations under this programme aggregated Rs. 174 million for textile industry,
construction activity, supply of products and services. Outstandings on March 31, 1990
stood at Rs. 871. million.

(b) Lines of Credit to Foreign Governments and Financial Institutions

Exim Bank offers lines of credit to foreign governments or overseas financial

institutions. Lines of credit aggregating Rs. 880 million have been sanctioned during the
period under review. Utilisation of lines of credit aggregated Rs. 466 million. Major part
of utilisations ware for exports to West Asia (54%), followed by Sub-Saharan Africa
(17%), Americas (11%) and South- East Asia/Far East & Pacific (10%). The major
products financed under this programme were commercial vehicles, power generation
and distribution equipment, bicycle and bicycle parts, paper mill machinery, diesel
engines and pumps, auto ancillaries and spares and textile machinery.

3. Landing Programmes for Commercial Banks in India

(a) Export Bills Rediscounting

Under this programme, Exim Bank provides short term funds to Indian
commercial banks against export bills that have unexpired usance of a maximum of 90
days. For this programme, the RBI sets the lending limit. At the year end, outstandings
stood at Rs. 500 million

(b) Small Scale Industry Export Bills Rediscounting

Under this programme, commercial banks can rediscount eligible export bills of
small scale industry exporters. For this programme, RBI sets the lending limit. Under this
programme, outstandings at the end of the year stood at Rs. 500 million.

(c) Refinance
 Exim Bank sanctioned and disbursed Rs. 654 million and Rs. 623 million
respectively for refinance assistance to commercial banks during the period. This
programme is operated primarily with the purpose of refinancing medium and long term
post-shipment credit extended by banks to Indian exporters. Utilistions of export credit
refinance for supplier’s credit was Rs. 431 million. Refinance assistance was also
extended to commercial banks for rupee term loans extended by them to project exporters
executing projects in West Asia. During the period, utilistions of refinance of rupee term
loans amounted to Rs. 192 million.

(d) Bulk Import Finance

Under this programme commercial banks avail of finance by discounting

promissory notes drawn in their favour by importer borrowers. Commercial banks in
India extending finance to firms engaged in the bulk import of eligible industrial inputs
can avail of this facility. For this programme, the RBI sets the lending limit. At the year
end outstandings stood at Rs. 1.0 billion.

Operations under Programmes of Non-Funded Assistance

Exim Bank sanctioned non-funded assistance in the form of guarantees worth Rs.
498 million and guarantees worth Rs. 394 million were issued. Major part of non-funded
assistance was for projects in West Asia, followed by South-East Asia/Far East & Pacific.
Construction projects accounted for 34% of sanctions and 36% of issues.

Export Promotion

Exim Bank during the year launched three promotional programmes aimed at
providing finance for export promotion. Funds were earmarked out of Bank’s Export
promotion Reserve for financing of consultancy studies undertaken by Indian consultants
enlisted by the Africa Project Development Facility. This facility has been set up by
International Finance Corporation, Washington D.C. jointly with UNDP and African
Development Bank. It seeks to promote private sector investment in Africa. Exim Bank
also mounted a programme to finance feasibility studies in developing countries: the
Project Preparatory Studies Overseas Programme. One approval was made during the
year for a feasibility study in the transport sector in South- East Asia/Far East & Pacific.
A third programme, provides finance towards market entry cost incurred by Indian firms
exporting to development countries.

Results

Exim Bank registered for the 12 months under report a net profit of Rs. 272
million (on account of General Fund) during April 1989- March 1990, as against a profit
of Rs. 284 million for the 15 months period January 1988- March 1989. This is after
adjusting for depreciation, possible loan losses and other normal provisions. Net profit
(on an annualised basis) has increased by 20% as compared to the previous year. Out of
this profit, Rs. 80 million accounts for the dividend paid to the Government of India and
Rs. 138 million is transferred to reserves. In addition, the Bank has transferred funds
aggregating Rs. 55 million into Export Promotion Reserve available for export promotion
purposes. Net profit of the export Development Fund during the period was Rs. 21
million, which is carried forward to the next year.

Current Position of Exim Bank – 1991-92

105% Rise in Export Bids by Exim Bank

The Export-Import Bank of India’s export bids touched Rs. 7,187 crore during
1991-92, showing a 105 per cent rise over the previous year as it completed 10 years of
its operation in March 1992 posting a cumulative profit of Rs. 203.4 crore during the
decade.

Exim Bank’s Performance:

The export contracts secured by Indian exporters shot up to Rs. 1,093 crore during
1991-92 from Rs. 896 crore, an increase of 22 per cent over the previous year.

The Exim Bank’s disbursements stood at Rs. 1,107 crore as against Rs. 858 crore
in the previous year, a 29 per cent increase, while loan outstanding increased by 23 per
cent, moving up to Rs. 1,616 crore on March 31, 1992, from Rs. 1.315 crore last year.

During the entire decade (1982-92) its exports bids were Rs. 48,740 crore, export
contacts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends
paid, Rs. 147.5 crore and Rs. 55 crore respectively.

Eighty export contacts, covering 25 countries and worth Rs. 1.093 crore, export
contracts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends
paid, Rs. 147.5 crore and Rs. 55 crore respectively .

The Bank’s net profit during the same period, on account of general fund,
amounted to Rs. 37.6 crore as compared to Rs. 30.8 crore in the previous year. A sum of
Rs. 10 crore would be paid to the central government as dividend, as compared to Rs. 9
crore during 1990-91.

The ratio of successful bids made was 12.4 per cent over the 10- year period
against the international standard of 15 per cent. Indian exporters “missed out” on 70 per
cent of the bids. Many bidders did not produce bank guarantees acceptable to the
importing countries and lacked of proper analysis of “hidden costs”. There ware hardly
any complaints about project exports, but there were some in the case of products.

Table 19.2
EXPORT FINANCING PROGRAMMES OF EXIM BANK
Programme Use Rate of interest @
Export Marketing Enables exporters to implement market
development programs
1. Grant
2. loan 14% p.a.
Export Product Development Enables Indian firms undertake product
development, R& D for exports
11.2% p.a.
Agency Credit Line* Enables upgradation/expansion of export
Production capabilities of small and 11.2% p.a.
medium enterprises
 Computer Software Exports
Hundred per cent Export oriented
Unit
Preshipment Credit
Project Preparatory
Services Overseas
Consultancy and Technology
services
Direct Financial Assistance to
Exporters
Overseas Buyer’
Credit
Lines of Credit
Refinance of export credit
Relending facility
Export Bills Rediscounting
Small Scale Industry (SSI) Export
Bills Rediscounting
Bulk Import Finance
Overseas Investment Finance
Notes: (a) interest rates are as on March 31, 1990 and subject to change.
• In collaboration with International Finance Corporation, Washington.
1982*
Operations
68900
Enable acquisition of imported and
indigenous computer systems, and project
related assets. 11.2% p.a.
Enables Indian companies to acquire:
indigenous assets Imported machinery 9% p.a.
and other assets 11.2% p.a.
Enables Indian exporter to buy raw
materials an inputs where exports require 9.5% p.a.
long cycle time
Enables Indian Consultancy firms
undertake project preparatory studies in
developing countries by grant/loan -
financing.
Enable Indian exporters of consultancy
services and technology to extend term 7.5% p.a.
credit to importer overseas
Enables Indian exporter to extend term
credit to importer overseas, of eligible 7.5% p.a.
Indian goods
Enables overseas buyer to pay cost of
eligible goods imported from India on 7.5% p.a.
deferred terms
Enables overseas financial institutions,
foreign governments, their agencies to
lend term loans to finance import of
eligible goods from India. 7.5% p.a.
Enables banks to offer credit to Indian
exporters of eligible goods, who extend 7.5% p.a.
term credit to foreign buyers
Enables overseas banks to make available
term finance to their clients, for import of
eligible Indian goods 7.5% p.a.
Enables banks to rediscount usance
export bills, with usance not exceeding
180 days and unexpired usance of a 7.5% p.a.
maximum period of 90 days.
Enables banks to fund
SSI Export bills, with usance not
exceeding 180 days and unexpired usance 7.5% p.a.
of a maximum period of 90 days
Enables banks to offer finance to
importers for bulk import of consumable 13.5% p.a.
inputs
Enables Indian promoter to finace equity
contribution in joint ventures set up 12.5% p.a.
abroad
Table 19.2
Past Eight Years of Exim Bank
1983 1984 1985 1986 1987 1988- 1989-90* Cumula
89* tive
42109 41730 40420 15390 81550 53870 36430 380399
 Value of birds
approved*
Commitments in
Principle* 3355 3898 5230 5770 3490 8280 5697 3948 39668
Sanctions 1990 3012 3386 4412 5621 6905 10626 9550 45502
Utilisations 1785 2057 3530 3813 5241 5989 9130 8878 40423
Outstanding 2199 2930 4147 5544 6438 7232 9347 11178

Not- Funded
Guarantees Committed
in principle*
Guarantees sanctioned 6833 3458 4300 3630 1790 10470 4070 3551 38102
Guarantees Issued 1019 753 752 732 763 517 488 498 5342
Guarantees 3986 4515 5102 4661 5290 4844 5373 5969
outstanding

Resources and Income

Resources
Capital 750 1000 1275 1475 1725 1945 2205 2338
Borrowings 2592 3486 4338 5090 6235 6992 7681 8614
Bonds - 530 530 780 1175 1610 2620 3200
Reserves 53 121 211 325 444 583 796 989
Total Resources 3559 5369 6691 8163 10474 12812 14840 17243

Earnings
Net Profit 63 88 120 154 170 199 284 272
Dividend 10 20 30 40 50 60 70 80
Staff (Numbers) 69 109 132 141 141 140 135 138

Ratios
Capital Assets
Ratio (%)***** 22.6 20.9 22.2 22.1 20.7 19.7 20.2 19.3
Net Profit on Capital
and Reserves (%) 9.1 9.2 9.4 8.6 8.5 8.2 8.6
Net Profit on Assets 2.0 2.0 2.1 1.8 1.7 1.6 1.7
(%)
Net Profit per
Employee (Rs. mn) 0.989 0.996 1.128 1.206 1.416 1.652 1.993

• Exim Bank started its operations in March 1982, the accounting years 1982
refers to March- December 1982, 1983 are calendar years. 1988-89 years
pertains to the period January 1988 to March 1989 due to change in a
accounting year. 1989-90 is April 1989 to March 1990.
• For approvals and commitments-in principle, where more than one Indian
company has submitted tenders for the same job, only one approval and
commitment –in-principle of maximum value was considered up to 1985 and
minimum value since 1986.
• Capital and Reserves as a % of Assets.
Note: Data pertains to General fund.
The Role Played by Export Credit Guarantee Corporation of India Ltd. in Risk
Management and Financial Gurantees

Role of the Corporation

ECGC Contributes to the country’s export efforts by improving the competitive

capacity of Indian exporters. Through its schemes of export credit insurance, the
Corporation makes it possible for exporters to match the credit terms offered by their
counterparts from other countries and thereby win more export orders in the highly
competitive international markets. By adopting a judicious underwriting policy which is
aligned to the nation’s needs, the Corporation also makes it possible for Indian exporters
to continue trading with certain counties to which, without its insurance cover, they
would not be able to ship goods because of temporary payment problems faced by such
countries. The Corporation also assists exporters to maximise their export turnover
through the guarantees that issues to the commercial banks in India. The guarantees,
which reduce the lading risk of the banks, create an environment in which exporters get
easier access to export finance, which is a critical factor for the rapid expansion of
business.
In the challenging and changing international environment, India’s export growth
potential will become more dependent on penetrating markets in the developed countries
and increasing its market share. The availability of ECGC’s insurance for short –term,
medium-term and long-term credit transactions as well as the various types of guarantees
to banks designed to facilitate easy availability of export finance, is of crucial importance
for optimising this potential.

Payment for exports are open to risks even at the best of times. The risks have
assumed large proportions today due to the far reaching political and economic changes
that are sweeping the world. An out-break of war or civil war may block or delay the
payment for goods exported. A coup or an insurrection may also bring about the same
result. Economic difficulties or balance of payments problems may lead a country to
impose restrictions on either import of certain goods or on transfer of payment for gods
imported. In addition, one has to contend with the usual commercial risks of insolvency
or protracted default of buyers. The commercial risks of the foreign buyer going bankrupt
or losing his capacity to pay are heightened due to the polticial and economic
uncertainties. Conducting export business in such conditions of uncertainty is fraught
with dangers.

The loss of a large payment may spell disaster for any exporter, whatever is his
prudence and competence. On the other hand, too cautious an attitude in evaluating risks
and selecting buyers may result in loss of hard-to-get business opportunities. Export
credit insurance is designed to protect exporters from the consequences of the payment
risks, both political and commercial, and to enable them to expand their overseas
business without fear of loss.

Export credit insurance also seeks to create a favorable climate in which exporters
can hope to get timely and liberal credit facilities from banks at home. For this purpose,
export credit insurer provides gurantees to banks to protect them from the risk of loss
inherent in granting various types of finance facilities to exporters.

In order to provide export credit insurance support to Indian exporters, the

Government of India set up the Export Risks Insurance Corporation (ERIC) in July,
1957. It was transformed into Export Credit & Guarantee Corporation Limited (ECGC)
in 1964. To bring the Indian identity into sharper focus, the Corporation’s name was once
again changed to the present Export Credit Guarantee Corporation of India Limited in
1983. ECGC is a company wholly owned by the Government of India. It functions under
the administrative control of the Ministry of Commerce and is managed by a Board of
Directors representing Government, Banking, Insurance, Trade, Industry, etc.

The covers issued by ECGC can be divided broadly into four groups:
(1) Standard Policies issued to exporters to protect them against payment risks
involved in exporters on short-term credit;
(2) Specific Policies designed to protect Indian firm against payment risks
involved in (a) exports on deferred terms of payment, (b) services rendered to
foreign parties, and (c ) construction works and turnkey projects undertaken
abroad;
(3) Financial gurantees issued to banks in India to protect them form risks of loss
involved in their extending financial support to exporters at the pre-shipmen
as well s post-shipment stages; and
(4) Special schemes, viz., Transfer Guarantee meant to protect banks which add
confirmation to Letter of Credit opened by foreign banks, Insurance cover
Investment Insurance and Exchanges Fluctuation Risk Insurance.

I. Standard Policies
ECGC has designed four types of Standard Policies to provide cover to shipment
made on short-term credit.

(i) Shipments (Comprehensive Risks) Policy – to cover both commercial and

political risks from the date of shipment.
(ii) Shipments (Political Risks) Policy- to cover only political risks from the
date of shipment.
(iii) Contracts (Comprehensive Risks) Policy- to cover both commercial and
political risks from the date of contract.
(iv) Contracts (Political Risks) Policy- to cover only political risks from the
date of contract.

The Shipments (Comprehensive Risks) Policy is the only ideally suited to cover
risks in respect of goods exported on short- term credit. This policy covers both
commercial and political risks from the date of shipment. Risk of pre-shipment losses due
to frustration of export contracts is nil or very low since goods, consumer goods or
consumer durables which can be resold easily Contracts policies, which cover risks from
the date of contract, are issued only in special cases when goods to be exported are
manufactured to non standard specifications of buyer.
Shipments to-associates or to agents and those against letters of credit can be
covered for only political risks by suitable endorsements to the Shipments
(Comprehensive Risks) Policy. Premium is charged on such shipments at lower rate.
“Deemed exports” can also be covered under the Comprehensive Risks Policies.

1. Risks Covered

The risks covered under the Standard Policies are:

(i) Commercial Risk

(a) insolvency of the buyer;

(b) buyer’s protracted default to pay for goods accepted by him; and

(c) buyer’s failure to accept goods, subject to certain conditions.

(ii) Political Risks

(a) Imposition of restrictions on remittances by the government in the buyer’s

country or any government action which may block or delay payment to the
exporter;

(b) War, revolution or civil disturbances in the buyer’s country;

(c) New import licensing restrictions or cancellation of a valid import licence in the
buyer’s country, after the date of shipment or contract as applicable;

(d) Cancellation of export licence or imposition of new export licensing restrictions

in India after effective date of contract (under contracts policy);

(e) Payment of additional handling, transport or insurance charges occasioned by

interruption or diversion of voyage which cannot be recovered from the buyer;
and

(J) Any other cause of loss occurring outside India, not normally insured by general
insurers, and beyond the control of the exporter and/or the buyer.

3. Risks not covered

The Standard Policies do not cover losses due to the following risks:

(a) Commercial disputes including quality disputes raised by the buyer, unless the
exporter obtains a decree from a competent court of law in the buyer’s country in
his favour;

(b) causes inherent in the nature of the goods;

(c) buyer’s failure to obtain necessary import or exchange authorisation from

authorities in his country;
 (d) insolvency or default of any agent of the exporter or of the collecting bank

(e) loss or damage to goods which can be coveted by general insurers;

(f) exchange rate fluctuation; and

(g) failure of the exporter to fulfill the terms of the export contract or negligence on
his part.

3. Exporter Co-insurer

It is customary in credit insurance to make the insured share a small percentage of

the risk. ECOC normally pays 90 per cent of the losses on account of political or
commercial risks. In the event of loss due to repudiation of contractual obligations by the
buyer, ECGC identifies the exporter upto 90 per cent of the loss if final and enforceable
decree against the overseas buyer is obtained in a competent court of law in the buyer’s
country. The Corporation, at its discretion, may waive such legal action where it is
satisfied that such legal action is not worthwhile and in that event also losses are
indemnified upto 90 per cent. Recoveries made after the payment of claim are shared
with the ECGC in the same proportion in which the loss was borne.

4. Whole Turnover Principle

ECOC expects a fair spread of risks insured. Therefore an exporter is required to

insure all the shipments that may be made by him during the next 2 years, except those
made against advance payment or Irrevocable Letters of Credit confirmed by banks in
India. Exclusions are, however, possible where items are not of an allied nature.

5. How to Obtain Policy

An intending exporter should fill in a proposal form (No. 121) available with all
ECGC offices (addresses given at the end) and submit it to the nearest office. After
examining the proposal, ECGC would send him an acceptance letter stating the terms of
its cover and premium rates. The policy will be issued after the exporter conveys his
consent to the premium rates and pays a non-refundable policy fee which will be Rs.
1001- for policies with Maximum Liability limit upto Rs. 5 lakhs; Rs. 200/- between Rs.
5 lakhs and Rs. 20 lakhs and Rs. 100/- for each additional Rs. 10 lakhs or part thereof
subject to a ceiling of Rs. 2,500/-.

5. Maximum Liability

Maximum Liability is the limit upto which ECGC would accept liability for
shipments made in each of the policy-years. It will be advisable for exporters to estimate
the maximum outstanding payments due from overseas buyers at any time during the
policy period and to obtain the policy with Maximum Liability for such value. The
maximum liability fixed under the policy can be enhanced subsequently, if necessary.

6. Credit Limit

Commercial risks are covered by ECGC subject to approval of a credit limit on

each buyer. Credit limit is the limit upto which claim can be paid under the policy for
losses on account of commercial risks. As commercial risks arc not covered in the
absence of a credit limit, exporters would be well advised to apply to ECGC for approval
of credit limit on buyer in the prescribed form (No 144) before making shipment. If
complete information regarding the buyer and his banker is given in the credit limit
application, it will facilitate receipt of credit information expeditiously. ECGC obtains
credit information on overseas buyers through banks and credit information agencies. On
the basis of credit information and its own experience, ECOC fixes suitable credit limits
on overseas buyers.

In case an exporter has already obtained a credit report on the buyer or is in

possession of other information that can help ECGC in fixing credit limit, the same may
be furnished along with credit limit application to facilitate quick decision. If the exporter
needs an enhancement in limit, he may apply in the prescribed form (NBNo.144A) giving
his past experience with the buyer.

(i) Status Enquiry Charges

ECGC spends a good amount on getting status reports on overseas buyers but
charges a nominal fee of Rs. 50/- for each application. An exporter need not pay any
status enquiry fee for credit limits upto Rs. 5 lakhs if he furnishes a bank report not older
than 6 months, on the buyer.

In case limit is required urgently, exporters may request ECGC to obtain cable
report on the buyer and remit an amount of Rs. 400/- towards cable expenses.
Alternatively exporter may obtain cable report through his bank and furnish the same in
original to ECGC for a quick decision.

(ii)Discretionary Limits

If no application for Credit Limit on a buyer has been made, ECGC accepts
liability for commercial risks upto a maximum of Rs. 5,00,000/- for D,P./C.A.D.
transactions and Rs. 2,00,000/- for D.A. transactions provided that:

(a) at least three shipments have been effected by the exporter to the buyer
during the preceding two years on similar payment terms and at least one of
them was not less than the discretionary limit availed of by the exporter and.
(b) the buyer had made payment for the shipments on due dates.

(ii) Restricted Cover Countries

When payment risks become too high in a country, ECGC provides cover for
shipments to such countries on a restricted basis. Policyholders intending to export to
such countries are required to obtain specific approval of ECGC for each
shipment/contract or series of shipments contracts upon payment of Specific Approval
Fee. If such approval is not taken, cover is not available even for political risks.

8. Declaration of Shipments & Payment of Premium

The premium rates are closely related to the risks involved and vary according to
countries to which goods are exported and the payment terms.

An exporter who has taken a Shipments Policy has to send by the fifteenth of each
month, a declaration of shipments made in the previous month, in the prescribed form
(No. 203). An exporter who obtains a Contracts Policy has to send a declaration of all
outstanding contracts immediately after the policy is issued. Thereafter he shall send a
monthly declaration of contracts concluded and shipments made by him during the
previous month. Premium has to be paid along with the declaration at rates shown in the
schedule attached to the policy.

9. Consignment Exports

Exports on consignment basis may be covered under Shipments (Comprehensive

Risks) Policy by a suitable endorsement thereon. While political risks are covered from
the date of shipment till the date of receipt of payment in India, commercial risks are
covered only alter the Agent/ Stockholder submits the ‘Accounts Sales’ to the exporter.
The risk of the Agent/Stockholder not returning the unsold goods is not covered under the
Policy.

10. Reporting Defaults

In the event of non-payment of any bill, policyholders are required to take prompt
and effective steps to prevent or minimise loss. A monthly declaration of all bills which
remain unpaid for more than 30 days should be submitted to ECGC in the prescribed
form (No. 205) indicating action taken in each case.

Granting extension of time for payment, covering bills from D.P. to D.A. terms or
resale of unaccepted goods at a lower price require prior approval of ECGC.

11. Settlement of Claims

A claim will arise when any of the risks insured under the policy materialises. If
an overseas buyer goes insolvent, the exporter becomes eligible for a claim one month
after his loss is admitted to rank against the insolvent’s estate or after four months from
the due date, whichever is earlier. In case of protracted default, claim is payable after four
months from the due date. Claims in respect of additional handling, transport or insurance
charges incurred by the exporter because of interruption or diversion of voyage outside
India are payable after proof of loss is furnished. In all other cases claim is payable after
four months from the date of the event causing loss.
However, in case of exports to countries where long transfer delays are
experienced, ECOC may extend the waiting period and claims for such shipments are
payable after the expiry of such extended period.

Where the buyer does not accept goods or pay for them because of differences
over fulfilment of the terms of contract by the exporter, ECGC considers claims after the
dispute between the parties is resolved and the amount payable is established by
obtaining a decree in a court of law in the country of the buyer. This condition is waived
in cases where the -Corporation is satisfied that the exporter is not at fault and that no
useful purpose would be served by proceeding against the buyer.
12. Debt Recovery

Payment of claim by the ECGC does not relieve an exporter of his responsibility
for taking recovery action and realising whatever amount that can be recovered. The
exporter should, therefore, consult the ECGC and take prompt and effective steps for
recovery of the debt. For its part, ECGC will help exporter by providing the name of a
reliable lawyer or debt collecting agency and by enlisting the help of India’s commercial
representative in the buyer’s country.

All amounts recovered, net of recovery expenses, should be shared with ECGC in
the ratio in which the loss was originally shared.

Receipt of a claim from ECGC does not relieve an exporter from obligations to
the Exchange Control Authority for receiving the amount from the overseas buyers.

II. Specific Policies

The Standard Policy is a whole turnover policy designed to provide a continuing

insurance for the regular flow of an exproter’s shipments of raw materials, Consumer
goods and consumer durables for which credit period does not exceed 180 days.
Contracts for export of capital goods or turnkey projects or construction works or
rendering services abroad are not of a repetitive nature. Such transactions are, therefore,
insured by ECGC on a case-to-case basis under specific policies.

All contracts for export on deferred payment terms and contracts for turnkey
projects and construction works abroad require prior clearance of Authorised Dealers,
Exim Bank or the Working Group in terms of powers delegated to them as per exchange
control regulations. Applications for this purpose are to be submitted to the Authorised
Dealer (the financing bank) which will forward applications beyond its delegated power
to the Exim Bank.

1. Specific Policy for Supply Contracts

Specific Policy for supply contracts may take any of the following four forms:

(i) Specific Shipments (Comprehensive Risks) Policy to cover both commercial and
political risks at the post-shipment stage;

(ii) Specific Shipments (Political Risks) Policy to cover only political risks at the
post-shipment stage in cases where the buyer is an overseas government or
payments are guaranteed by a Government or by banks, or are made to
associates;

(iii) Specific Contract (Comprehensive Risks) Policy; and

(iv) Specific Contract (Political Risks) Policy.

Contracts Policy provides cover from the date of contract. Losses that may be
sustained by an exporter at the pre-shipment stage due to frustration of contract are
covered under this policy in addition to the cover provided by the Shipments Policy.
2. Insurance cover for Buyer’s Credit and Line of Credit

Financial institutions in India, like those in several other countries, have started
direct lending to buyers or financial institutions in developing countries for importing
machinery and equipment from India. This kind of financing facilitates immediate
payment to exporters and frees them from the problems of credit management as well as
from the fear of loss on account of overseas credit risks.

Financing may take the form of Buyer’s Credit or Line of Credit. Buyer’s Credit
is a loan extended by a financial institution, or a consortium of financial institutions to the
buyer for financing a particular export contract. Under Line of Credit, a loan is extended
to government or financial institutions in the importing country for financing import of
specified items from the lending country.

ECGC has evolved schemes to protect financial institutions in India which extend
these types of credit for financing exports from India. Insurance Agreement will be
drawn’ up on a case-to-case basis, having regard to the terms of the credit.

3. Services Policy

Where Indian firms render services to foreign parties, they would be exposed to
payment risks similar to those involved in export of goods. Services Policy offers
protection to Indian firms against such payment risks. The policy has been designed
broadly on the lines of ECGC insurance policies covering export of goods.

Normally cover is issued on a case-to-case basis, covering risks from the date of
contract. If the employer is an overseas government of if payments under a contract are
guaranteed by an overseas government or a bank, a Specific Services Contract (Political
Risks) Policy can be obtained. A Specific Services Contract (Comprehensive Risks)
Policy will be appropriate for contracts concluded with private buyers not supported by
bank guarantees.

If the nature of services rendered by an exporter is such that contracts covering

short periods of time are concluded with a set of buyers on repetitive basis, it would be
convenient for him to obtain a Whole turnover Services Policy providing cover for either
comprehensive risks or only political risks. Such policies will obviate the need for getting
approval of the Corporation for each and every contract. Contracts can be concluded with
any buyer within credit limits previously approved by the Corporation and declared under
the policy. Exporters taking such policies are required to cover under the policy all
contracts that may be concluded by them over the policy period of 2 years.

A wide range of services like technical or professional services, hiring or leasing

can be covered under the policies.

The Comprehensive Risks Policy covers the following risks:

(i) insolvency of the buyer,
(ii) (it) protracted default in payment;
(iii) restriction on remittances in the buyer’s country or any Government action
which may block or delay payment to the exporter
 (iv) war between India and the buyer’s country
(v) revolution or other civil disturbances in the buyer’s country;
(vi) Government action in India or in buyer’s country which prevents the
performance of the contract; and
(vii) any other cause of loss occurring outside India and beyond the control of the
buyer or the seller.

The policies do not cover losses arising from events preventing the completion of
the contract in circumstances where such frustration could free the buyer from his
obligation to make payment under the contract.

The policy covers 90 per cent of the loss suffered by the seller. The claim is
payable after four months from the due date of payment if the loss arises due to the risk
of protracted default. In case of insolvency, claim is payable after four months from the
due date of payment or one month after the loss is admitted to rank, against the
insolvent’s estate, whichever is earlier. It is payable after four months from the due date
or the date of the event which is the cause of loss, as the case may be if the loss is caused
by any of the other risks.

Premium rates are closely related to the risks involved and vary according to the
country of the buyer and the terms of payment. Quotations for any specific proposition or
business on hand can be obtained by writing to ECGC giving details thereof.

The Services Policy covers such contracts under which only services are to be
rendered. Contracts under which rendering of services is part and parcel of a bigger
contract for supply’ of goods or machinery or erection of a plant are covered under
Construction Works Policies.

4. Construction Works Policy

ECGC’s Construction Works Policy covers civil construction jobs as well as

turnkey projects involving supplies and services. It provides cover for all payments that
fall due to the contractor under the contract.
Two types of policies have been evolved to cover contracts with (i) Government
buyers and (ii) Private buyers. The former covers political risks in respect of contracts
with overseas governments or where the payments are guaranteed by government and the
latter comprehensive risks. In case of contracts with private employers, the policy may be
issued to cover only political risks if the payments are guaranteed by a bank or covered
by L/C.
The policy has been designed to cover business done under the Standard
Conditions of Contract (International) prepared by the Federation Intemationale des
Ingenieurs Conseils (FIDIC) jointly with the Federation Internationale due Batirnent et
des Travaux Publics (FIBTP); but it may be modified to apply to other contracts.

The following risks, are covered in case of contracts with government employers
or if the payments are guaranteed by the employer’s government

(i) default of the Government employer;

(ii) delay in the transfer of payments to India;
(iii) war between Indian and the employer’s country;
 (iv) civil war or similar disturbances in the employer’s country;
(v) imposition of import or export licensing (or cancellation of an existing licence)
for goods or materials manufactured or purchased by the contractor after the date
of contract, for use on the contract, and for which on the date of loss the
employer has no obligation to pay in terms of the contract;
(vi)additional handling, transport or insurance charges due to interruption or
diversion of voyage; and
(vii) the employer’s failure to pay to the contractor sums awarded in arbitration
proceedings under the contract.

The percentage of loss payable by ECGC is 85 under policies issued to cover

contracts with Government employers and 75 in case of policies covering contracts with
private employers.

The policy is issued on the basis of estimated basic contract price, estimated
interest and other payments due under the contract. Premium is payable at the outset on
the estimated figures. Proportionate refund of premium is allowed where the actual
contract price and interest charges fall below the estimates.

Cover can also be provided for the contractor’s equipments (such as cranes,
bulldozers and trucks which are used for the construction) against the risk of confiscation,
by means of an endorsement to the policy if the contractor so desires.

The policy is issued to cover specific contracts and takes effect from the date of
contract.

HI. FINANCIAL GUARANTEES

Exporters require adequate financial support from banks to carry out their export
contracts. ECGC’s guarantees protect the banks from losses on account of their lendings
to exporters. These guarantees have been designed to encourage banks to give adequate
credit and other facilities for exports, both at pre-shipment and post-shipment stages, on a
liberal basis.

Six guarantees have been evolved for the purpose:

(1) Packing Credit Guarantee.

(2) Export Production Finance Guarantee.
(3) Post-Shipment Export Credit Guarantee.
(4) Export Finance Guarantee.
(5) Export Performance Guarantee.
(6) Export Finance (Overseas Lending) Guarantee.

These guarantees give protection to banks against losses due to nonpayment by

exporters on account of their insolvency or default. ECGC pays thee-fourths of the loss in
the case of Post-Shipment Export Credit Guarantee, Export Finance Guarantee, Export
Performance Guarantee and Export Finance (Overseas Lending) Guarantee and two-
thirds of the loss in others.

The Corporation agrees to pay higher percentage of loss to banks which offer to
cover all their pie-shipment advances under a Whole-turnover Packing Credit Guarantee.
Similarly, a higher percentage of cover is offered under Post-Shipment Export Credit
Guarantee if the bank agrees to cover all its post-shipment advances on whole turnover
basis.

In special cases, ECGC also considers payment of claim to the extent of 80 per
cent of the loss in respect of advances granted under Post-Shipment Export Credit
Guarantee against shipments of engineering and metallurgical items of the value of Rs. 2
crores or more under a single contract. In the case of Export Performance Guarantee and
Export Finance (Overseas Lending) Guarantee, ECGC provides higher cover of 90 per
cent of the loss on payment of proportionately higher premium.

1. Packing Credit Guarantee

Any loan given to an exporter for the manufacture, processing, purchasing or

packing of goods meant for export against a firm order or Letter of Credit qualifies for
Packing Credit Guarantee. ‘Pie-shipment’ advances given by banks to parties who enter
into contracts for export of services or for construction works abroad, to meet preliminary
expenses in connection with such contracts are also eligible for cover under this
guarantee. The requirement of lodgement of letter of credit/export order for granting
Packing Credit advances may be waived, as permitted by the Reserve Bank of India for
certain commodities.

The premium rate is 7.5 paise per Rs. 100/- per month or part thereof. A lower
rate of 5 paise per Rs. 100/- per month is charged under the Whole turnover Packing
Credit Guarantee (WTPCG). Premium under WTPCG is payable on the daily average
product basis, while under individual guarantees it is payable on maximum outstandings.
The percentage of loss covered under Whole turnover Packing Credit Guarantee is 75 as
against 66-2/3 per cent under individual guarantee.

Banks which opt for WTPCG will be eligible for similar concessions in respect of
Export Production Finance Guarantee and Export Finance Guarantee also. These
concessions are available also in respect of advances against contracts for supplies on
deferred terms and for construction works, but the banks will have to obtain separate
guarantees for such advances.

2. Export Production Finance Guarantee

The purpose of this guarantee is to enable banks to sanction advances at the pre-
shipment stage to the full extent of cost of production when it exceeds the f.o.b. value of
the contract/order, the difference representing incentives receivable. The extent of cover
and the premium are the same as the Packing Credit Guarantees. Banks having
WTPCG/WTPSG are eligible for concessionary premium rate and higher coverage.

3. Post-shipment Export Credit Guarantee

Post-shipment finance given to exporters by banks through purchase, negotiation

or discount of export bills or advances against such bills qualifies for this guarantee. It is
necessary, however, that the exporter concerned should hold suitable shipments or
contracts policy of ECGC to cover the overseas credit risks.

The premium rate for this guarantee is 5 paise per Rs. 100/- per month. The
percentage of loss covered under the individual Post Shipment Guarantee is 75.

This guarantee is also issued on whole turnover basis, offering a higher

percentage of cover at a reduced rate of premium. The percentage of cover under the
Whole turnover Post-Shipment Guarantee is 85 for advances granted to exporters holding
ECOC policy. Advances to non-policy holders are also covered with percentage of cover
being 60. The premium rate is 3paise per Rs.100/- per month if advances against LJC
bills are also covered under the guarantee, otherwise it is 4 paise.

Post-Shipment Export Credit Guarantee can also be had, even where an exporter
does not hold an ECGC Policy for finance granted against L/C bills, provided that an
exporter makes shipments solely against Letters of Credit. The premium rate for this
cover is 10 paise per Rs. 100/- per month on the highest amount outstanding on any day
during the month and the percentage of cover is 75. Advances against bills under letters
of credits opened by banks in countries placed under Restricted Cover shall be subject to
prior approval of the Corporation.

4. Export Finance Guarantee

This guarantee covers post-shipment advances granted by banks to exporters

against export incentives receivable in the form of cash assistance, duty drawback etc.

The premium rate for this guarantee is 5 paise per Rs. 100/- per month and the
cover is 75 per cent. Banks having WTPCG/WTPSG are eligible for concessionary
premium rate and higher coverage.

5. Export Performance Guarantee

Exporters are often called upon to execute bonds, duly guaranteed by an Indian
bank, at various stages of export business. An exporter who desires to quote for a foreign
tender may have to furnish a bank guarantee for the bid bond. If he wins the contract, he
may have to furnish bank guarantees to foreign buyers to ensure due performance or
against advance payment or in lieu of retention money or to a foreign bank in case he has
to raise overseas finance for his contract.
Further, for obtaining import licences for raw materials or capital goods, exporters
may have to execute an undertaking to export goods of a specified value within a
stipulated time, duly supported by bank guarantees. Bank guarantees arc also furnished
by exporters to the Customs, Central Excise or Sales Tax authorities for the purpose of
clearing goods without payment of duty or for exemption from tax for goods procured for
export. Exporters also furnish guarantees in support of their export obligations to Export
Promotion Councils, Commodity Boards, the State Trading Corporation of India, the
Minerals and Metals Trading Corporation of India or recognised Export Houses. To
provide protection to banks which issue the above types of guarantees, ECGC has
evolved the Export Performance Guarantee.
 An export proposition may be frustrated if the exporter’s bank is unwilling to
issue the guarantee. The Export Performance Guarantee is aimed at meeting such
situations. The guarantee which is in the nature pf a counter-guarantee to the bank is
issued to protect the bank against losses that it may suffer on account of guarantees given
by it on behalf of exporters. This protection is intended to encourage banks to give
guarantees on a liberal basis for export purposes.

Normally cover is extended upto 75 per cent of loss but in the case of guarantees
in connection with bid bonds, performance bonds, advance payment and local finance
guarantees and guarantees in lieu of retention money, the cover may be increased upto 90
per cent subject to proportionate increase in premium.

While the premium rate for guarantees issued to cover bonds relating to exports
on short-term credit is 0.90% p.a. for 75% cover and 1.08% p.a. for 90% cover, it is
lower for bonds relating to exports on deferred credit and projects. The rate of premium is
0.80% p.a. for 75% cover and 0.95% p.a. for 90% cover.

In the case of Bid Bonds relating to exports on medium/long-term credit1 overseas

projects, and the projects India financed by international financial institutions as well as
supplies to such projects, ECGC is agreeable to issue Export-Performance Guarantee on
payment of 25% of the prescribed premium. The balance premium of 75% becomes
payable to the Corporation by the bankers if the exporter succeeds in the bid and gets the
contract.

6. Export Finance (Overseas Lending) Guarantee

If a bank financing an overseas project provides a foreign currency loan to the

contractors it can protect itself from the risk of non-payment by the contractor by
obtaining Export Finance (Overseas Lending) Guarantee. Premium rate will be 0.90% per
annum for 75% cover and 1.08% per annum for 90% cover. Premium is payable in Indian
rupees. Claims under the guarantee will also be paid only in Indian rupees.

IV. SPECIAL FACILITIES

I. Small Scale Exporters

With a view to enabling the small scale sector to participate to a greater extent in
the export activities of the country, ECGC provides specials facilities to small scale
exporters by offering higher percentage of cover and procedural relaxations under its
policies and guarantees.
These facilities will apply to exporters whose annual export turnover is not more
than Rs. 25 lakhs and total annual turnover, including exports, ices not exceed Rs. 40
lakhs. Also, small scale industrial units as defined by Government of India whose annual
exports do not exceed Rs. 25 lakhs shall be deemed to be small scale exporters,
irrespective of their total business turnover. Further, exports made by qualifying small
scale exporters through (a) co-operative of artisans, (b) co-operatives or associations
consortia of small scale industries, (c) Handloom and Handicrafts Export Corporation or
state export corporations, (d) state small scale industries corporations, and (e)National
Small Industries Corporation are also eligible for these special facilities.

Main facilities provided under the scheme are: higher cover of 90 per cent for
banks under the Whole turnover Packing Credit Guarantee; and higher cover of 90 per
cent under the Whole turnover Post-shipment Export Credit Guarantee in respect of
exporters who have taken ECGC contracts/ shipments policy and 65 per cent cover for
non-policy holders. Cover under Standard Policy is increased to 95 per cent against
commercial risks and 100 per cent against political risks, provided the Maximum
Liability under the policy does not exceed Rs. 5 lakhs. The waiting period for payment of
all types of claims is reduced to half the normal stipulated period.

2. Simplified Scheme for Small Exporters

With the objective of helping small exporters, ECGC has evolved a simplified
scheme viz., the Lumpsum Premium Scheme. The scheme is applicable to the exporters
whose annual export turnover does not exceed Rs. 10 lakhs. The maximum liability of the
policy under the scheme is restricted to Rs. 5 lakhs.

The rate of premium on the policy is 50 paise per Rs. 100/- per annum on the
maximum liability of the policy, payable as a lumpsum at the time of the issue of the
policy. Small exporters who opt for this scheme have to observe all the terms and
conditions of policy but they are not required to submit monthly shipment declarations.
Specific approval has to be obtained in respect of exports to ‘Restricted Cover
Countries’: such exports would attract payment of specific approval fee, wherever
applicable. Shipments to restricted cover countries are required to be declared every
month in form (No. 203) by the 15th of succeeding month and premium paid thereon at
the rates indicated in the premium schedule attached to the policy.

3. Exporters of Books and Publications

In view of the special features of export trade in books and publications, the
following liberalisaijons have been made under the Standard Policy for exporters of
books and publications.
1. In case of exports to individuals, on whom Credit Limit is not fixed, normal
cover of 90% will be available provided that the value of each consignment does
not exceed Rs. 5,000.
2. In Case of exports to regular book dealers, on whom credit limit is not fixed,
normal cover of 90% will be available provided that the value of each
consignment does not exceed Rs. 25,000.
3. In case of exports to institutions like universities, libraries and research
organisations, on whom he credit limit is fixed, normal Cover of 90% will be
available provided that the value of each consignment is not more than Rs.
50,000.
4. Cover upto Rs. 50,000 will be available for exports to an individual, institution,
or a dealer if at least two shipments on similar terms of payment had been made
in the preceding twelve months and payment for them received on due dates.
5. Shipments made in a calendar month can be declared, along with payment of
premium before the 25th of the following month, as against the normal time limit
of 15 days.
6. Premium will be charged at a special low rate, varying with the group under
which the country is classified.

The above facilities shall apply to buyers in all countries except those which are
subject to Restricted Cover (i.e. the countries to which special condition No.7 of
 Annexure 2 to the Premium Schedule applies).

V. SPECIAL SCHEMES

1. Transfer Guarantee
When a bank in India adds its confirmation to a foreign Letter of Credits it binds
itself to honour the drafts drawn by the beneficiary of the Letter of Credit without any
recourse to him provided such drafts are drawn strictly in accordance with the terms of
the Letter of Credit. The confirming bank will suffer a loss ii the foreign bank fails to
reimburse it with the amount paid to the exporter. This may happen due to the insolvency
or default of the opening bank or due to certain political risks such as war, transfer delays
or moratorium which may delay or prevent the transfer of funds to the banks in India.
The Transfer Guarantee seeks to safeguard banks in India against losses arising out of
such risks Transfer Guarantee is issued, at the option of the bank, either to cover political
risks alone, or to cover both political and commercial risks. Loss due to political risks is
covered upto 90 per cent and loss due to commercial risks upto 75 per cent.

Premium will be charged at rates normally applicable to the Corporation’s

insurance policy covering export of goods.

2. Overseas Investment Insurance

With the increasing exports of capital goods and turnkey projects from India, the
involvement of exporters in capital participation in overseas projects has assumed
importance. The developing countries, who are bur main customers, have the problem of
scarcity of capital and management and may like to invite Indian participation in capital
and manageinent when large turnkey projects are set up. The exporter’s participation in
capital and management instills confidence in the buyer about proper functioning of the
project.

ECGC has evolved a scheme to provide protection for such investments. Any
investment made by way of equity capital or united loan for the purpose of setting up or
expansion of overseas projects will be eligible for cover under investment insurance.

The investments may be either in cash or in the form of export of Indian capital
goods and services. The cover would be available for the original investment together
with annual dividends and interest payable.

The risks of war, expropriation and restriction on remittances are covered under
the schemes. As the investor would be-having a hand in the management of the joint
venture, no cover for commercial risks would be provided under the scheme. For
investment in any country to qualify for investment insurance there should preferably be
a bilateral agreement providing investment of one country in the other. ECOC may
consider providing cover in the absence of any agreement or code, provided it is satisfied
that the general laws of the country afford adequate protection to the Indian investment.

The period of insurance cover will not normally exceed 15 years. In case of
projects involving long erection period cover may be extended for a period of 15 years
from the date of completion of the project Subject to a maximum of 20 years from the
date of commencement of investment. Amount insured shall be reduced progressively in
the last five years of the insurance period.

3. Exchange Fluctuation Risk Cover Schemes

The Exchange Fluctuation Risk Cover Schemes are intended to provide a

measure of protection to exporters of capital goods, civil engineering contractors and
consultants who have often to receive payments over a period of years for their exports,
construction work or services. Where such payments are to be received in foreign
currency, they are open to exchange fluctuation risk and the forward exchange market
does not provide cover for such deferred payments.
The Exchange Fluctuation Risk Cover is available for payments scheduled over
a period of 12 months or more, upto a maximum of 15 years. Cover can be obtained from
the date of bidding right upto the final installment.

At the stage of bidding, an exporter/contractor can obtain Exchange Fluctuation

Risk (Bid) Cover. The basis for cover will be a “reference rate” agreed upon. The
reference rate can be the rate prevailing on the date of bid or a rate approximating it. The
cover will be provided initially for a period of twelve months and can be extended if
necessary. If the bid is successful, the exporter/contractor is required to obtain Exchange
Fluctuation (Contract) Cover for all payments due under the contract. The reference rate
for the contract cover will be either the reference rate used for the Bid cover or the rate
prevailing on the date of contract, at the option of the exporter/contractor. If he bid is
unsuccessful, 75 per cent of the premium paid by the exporter/contractor is refunded to
him.
The Exchange Fluctuation Risk (Contract) Cover can be issued only if the
payments under the contract are scheduled to be received beyond 12 months from the
date of contract but in such cases, the cover will apply for any instalment falling due
within I2months as well. Cover will be available for all amounts receivable under the
contract, whether it is payment for goods or services or interest or any other payment.
Contracts coming under Buyer’s Credit and Lines of Credit are also eligible for cover
under the schemes. The exporter has also an option to terminate the-contract at the expiry
of the third year, by giving three months’ advance notice.

Cover under the schemes is available for payments specified In US Dollar, Pound
Sterling, Deutsche Mark, Japanese Yen, French Franc, Swiss France UAE Dirham and
Australian Dollar. However, cover can be extended for payments specified in other
convertible currencies at the discretion of the ECOC.

Exchange Fluctuation Risk Cover will normally be provided along with suitable
credit insurance cover. There is, however, provision to grant the cover independently also
in which case premium will be loaded by 20%.

The contract cover provides franchise of 2 per cent loss or gain within a range of
2 per cent of the reference to the exporter’s account. if loss exceeds 2per cent, ECOC will
make good the portion of loss in excesse of 2 per cent but not exceeding 35 per cent of
the reference rate. In other words, losses upto 2 per cent and beyond 35, per cent of the
reference rate will be to the exporter’s account. If there be a gain in excess of 2 per cent
of the reference rate, the portion which is beyond 2 per cent and upto 35 per cent will be
turned over the ECGC.
 The rate of premium is 40 paise per Rs. 100/- per year or 10 paise per Rs. 100/-
per quarter for the bid cover and the total premium is payable at the time of issue of the
policy.

Premium for contract cover is also payable at the rate of 40 paise per Rs. 100/-
per annum. Ten per cent of the total premium payable and premium for the first two years
should be paid at the Lime of issue of the policy. Thereafter the annual premium will
have to be paid in such a manner that premium for the next two years is always kept paid
to the Corporation.

Over the Years Performance Evaluation of ECGC

The total premium earned by the Corporation from its inception in the year 1957
to the end of the financial year 1989-90 amounted to Rs. 274 crores. Gross claims paid
during the same period amounted to Rs.272 crores. After taking into account the recovery
of Rs. 69 crores effected during the period, the net claims paid by the Corporation
amounted to Rs. 203 crores. A surplus of Rs. 71 crores has thus resulted but, as against
this, there are pending claims for which the estimated net liability is Rs. 107.32 crores
and claims that may arise in respect of transactions for which premium has been received
but the risks have not yet expired. The total value of risks covered by the Corporation
during the period amounted to Rs. 1,59,730 crores indicating the extent of support
provided by the Corporation to the country’s export promotion efforts.

The outstanding features of the Corporation’s performance during the year are
the 56% increase in Risk Value and 67% growth in premium income. That the year ended
with a surplus of Rs. 9.10 crores in 1988-89 and Rs. 3.18 crores in 1987- is another not
worthy feature.

Premium income from short-term business increased from Rs. 13.31 crores in
1987 to Rs. 18.53 crores in 1988-89 (annualised) and from there to Rs. 37.65 crores in
1989-90, while the premium income from medium and long-term business remained
almost stagnant at around Rs. 9 crores during this period. Although the lack of growth in
the medium and long-term business has been a setback, the beneficial effects of the rapid
growth in the income from short-term business must be recognised. Firstly, shot-term
business under guarantees as well as policies is a steady business as compared to medium
and long-term business which is subject to wide fluctuations from year to year. Secondly,
short- term business which is composed of a very large number of small value
transactions is a low risk business while the medium and long-term business which
consists of a relatively small number of large-value transactions is a low risk business
while the medium and long-term business which consists of a relatively small number of
large-value transactions is far more risky. The short-term business is less risky also
because it has a wide country spread, whereas the medium and long-term business is
concentrated in a very small number of countries which are more risk prone. The
operational results of the last five years bear out this point. Between 1985 and 1989-90,
claims paid under shot-term business totaled Rs. 43.90 crores as against a premium
income of Rs. 56.13 crores. On the other hand, claims relating to premium income added
up to only Rs. 51.60 crores. It is thus clear that short-term business assuming an
increasing share of the total business is a highly desirable development.

The last decade has been a turbulent period for export credit insurers in general.
Except for the last 2 or 3 years of the decade, most export credit insures experienced
decline in business and in income. Their travails were further heightened by an
abnormally large outgo on account of claims which arose as a result of the bad balance of
payments position of an increasingly large number of developing countries. ECGC was
not as badly affected as some of the other export credit insurers who had large exposures
on the heavily indebted countries. Yet, the total amount of the Corporation’s money
blocked in half-a-dozen African countries on account of claims paid due to transfer
delays comes to as much as Rs.118 crores. These claims relate mainly to business
underwritten by the Corporation in late 1970s and early 1980s when these countries were
considered as acceptable credit risks. These claims are tapering off but the relief arising
on this account appears to be short lived because of certain new developments. The
turmoil in the Middle East following Iraqi annexation of Kuwait holds the threat of large
claims not only on account of counties directly involved in the conflict but also from
some other countries because of the adverse impact of the conflict on them.

The immediate future of export credit insurers, therefore, looks far from rosy.
Added to this are the uncertainties arising from certain fundamental changes that are
taking place in the political and economic spheres in the former USSR, Eastern Europe
and Western Europe. ECGC has, therefore, to tread warily in the coming years. Too
much caution will run counter to its very objective of export promotion. Too liberal an
attitude, on the other hand, may land it in serious financial embarrassment. In any event,
Corporation’s ability to extend to Indian exporters the kind of support that is legitimately
expected of a national export credit insurer in such circumstances will be severely
restricted unless Government support in one form or the other becomes available. ECGC
had made a proposal to the Government of India for setting up a National Export
Insurance Fund under which the Corporation can grant insurance, in the national interest,
to transactions for which it would not be possible for the Corporation to grant cover on its
own account on grounds of financial prudence.

It is necessary for the Corporation to keep on expanding its business base and
augmenting its financial strength to the maximum extent possible. The number of steady
and satisfied customers needs to be continually increased and this is possible only be
responding better to their needs and by improving the quality of service. Much has been
achieved in the last tow years through improved systems and procedures and the
increased use of computers. A lot more along these lines needs to be done in the coming
years to turn the corporation into a modern and highly efficient organisation capable of
creating and retaining an ever-increasing number of customers. The field organisation
was strengthened last year with a view to increasing personal contact with customers and
getting new business. A decision has recently been taken to post additional officers in the
Regional and Branch officers to specifically take care of satellite centers in the
geographical area covered by the respective officers. The main job of the officer, who
will be based in the Regional or Branch Office, will be to develop business form certain
centers which have export activity that is too small to justify setting up of a branch office.

The premium income of the Corporation which is rising fast-from Rs. 22.25
crores in 1987 to Rs. 47.46 crores in 1989-90 and targeted to touch Rs. 80 crores in 1990-
91- has already imparted a measure of strength to the financial position of the
Corporation and has considerably augmented its capacity to meet claims. The premium
rates under policies and whole turnover guarantees were raised from June 1989 in order
to improve the viability of the schemes. But, considering the nature of the business and
the very large risk exposure of the corporation, it is necessary that the capital of the
Corporation, which is at present Rs. 50 crores, is raised further so that equity will bear a
reasonable relation to risk exposure.

Performance Highlights

The operational results for the year were very satisfactory. The total value of
business covered under all the schemes increased from Rs. 25,340 crores in 1988-89
which was a 15 month period, to Rs. 31,709 crore in 1989-90. Premium income rose
from Rs. 35.42 crores in 1988-89 to Rs. 47.46 crores in 1989-90. On an annualised basis,
the growth rate was 56% in business covered and 67% in premium income, which are the
highest rates of growth achieved by the Corporation, in the last fifteen years. Claims paid
during the year were higher at Rs. 43.97 crores as compared to Rs. 34.72 crores in 1988-
89. Recoveries also showed a marked improvement, rising from Rs. 4.79 crores in 1988-
89 to Rs. 9.39 crores in 1989-90. Net claim payments went up form Rs. 29.93 crores in
1988-89 to Rs. 34.58 crores in 1989-90.

From Stagnation to Rapid Growth

There has been a sea- change in the fortunes of the Corporation during the last
two years. The stagnation encountered by the Corporation between 1983 and 1987 has
since been transformed into an era of rapid growth as would be evident from the Table
19.3.

It is most significant to note that the total income of Corporation has increased
from Rs. 31.48 crores in 1987 to Rs. 67.39 crores in 1989-90 and have a healthy target of
Rs. 84.19 crores for the year 1990-91. This growth infused vitality and strength to the
financial position of the corporation and makes it possible for it to take larger claims in
its stride.
Table 9.3
(Value Rs. Crores)
YEAR Risk value Premium Other Total % growth*
Income Income
1983 8,465 19.49 4.86 24.35
1984 10,083 21.34 5.26 26.60 +9.24
1985 10,138 21.60 7.03 28.63 +7.63
1986 12,293 21.42 8.67 30.09 +5.10
1987 14,834 22.25 9.23 31.48 +4.62
1988-89 25,340 35.42 19.14 54.56 +38.66*
1989-90 31,709 47.46 19.93 67.69 +54.39*
* growth on annualised basis

This improvement has been achieved despite a stagnation in the project and term
exports sectore. The premium income in this sector increased only marginally from Rs.
8.94 cores crores in 1987 to Rs. 9.81 Crores in 1989-90. This brings into sharper focus
the fact that the growth in the short term sector has been very fast. The premium on short
term policies and guarantees increased from Rs. 13.31 crores in 1987 to Rs. 37.65 crores
in 1989-90. Fixing of challenging business targets for all officers, effective monitoring of
the monthly progress and strengthening of marketing efforts are the main reasons for this
remarkable performance.

Standard Policies and Transfer Guarantees

 The Standard Policies provide insurance for shipments made on short term credit
covering commercial and political risks. Transfer guarantees protect the banks in India
against certain losses which may arise when they add confirmation to foreign Letters of
Credit.
The number of Standard Policies in force at the end of the year was 10,385
showing and increase of 23.57% over the corresponding figure of 8,768 for the preceding
year. Thirty six Transfer Guarantees were issued during the year s against 60 in 1988-89.
The total value of shipments declared under both the schemes amounted to Rs.
4,561crores, registering year. This growth is the highest registered in the last two
decades. Premium income at Rs. 12.66 crores showed an impressive growth of 84.28%
over that of 1988-89 on an annualised basis.

Claims paid during the year amounted to Rs. 1.94 crores. Of this, 73.71% were
claims paid on account of commercial risks viz., default, insolvency and repudiation,
mainly in the UK, USA, France, Malaysia and Italy, Recoveries amounted to Rs. 7.28
crores as against Rs. 2.34 crores in 1988-89. The net position was surplus of Rs. 8\18
crores as against a deficit of Rs. 0.05 crore in 1988-89.

Engineering goods, readymade garments, leather goods and chemicals continued

to account for a major portion of the value of exports covered by the Corporation. Their
share in the total exports covered by the Corporation increase from 54.23% in 1988-89 to
61.29% in 1989-90. The Contribution of the four commodity groups to the premium
income also increase from 52.40% in 1988-89 to 55.79% in 1989-90. The highest rate of
growth was seen in respect of chemicals which contributed to 14.91% of exports covered
and 10.22% of premium income in 1989-90 as against 8.04% respectively, in the
preceding year.

Policies- Project and Term Exports

Business in this sector comprising policies issued to cover credit risks involved
in exports on medium and long term credit, constriction works, services, lines of credit,
buyers credit and overseas investments, showed marginal improvement. Seventy six fresh
Policies were issued during the year as against 150 policies in the preceding year. The
premium income amounted to Rs. 4.93 crores, registering a growth of 11.29% on and
annualised basis. The value of business covered rose from Rs. 333 crores in 1988-89 to
Rs. 480 crores in 1989-90. The total number of policies in force at the end of the year was
678 as against 655 in the preceding year.

Claims paid during the year amounted to Rs. 24.65 crores, which is a substantial
increase over the figure of Rs. 10.69 crores for the preceding year. Mozambique, Zambia,
Tanzania and Sudan accounted for the major portion of claim payments, the deficit in this
sectore rose from Rs. 3.45 crores in 1988-89 to Rs. 18.67 crores in 1989-90.

Guarantees

The guarantees issued to banks have been designed to encourage banks to give
adequate credit and other facilities for exports. These protect the banks from losses
inherent in their granting advances to exporters or their giving guarantees oh behalf of
exporters.
(i) Guarantees - Short Term Exports

The guarantees relating to short term exports showed excellent results. The value
of bank finance covered by the guarantees rose by 57.52% over the annualised figure for
the previous year to reach the level of Rs. 26,473 crores. Premium income also rose from
Rs. 14.58croes to Rs. 24.99 crores, registering a very impressive annualised growth of
114.32%. The total value of claims paid during the year came to Rs. 5.87 crores.
Recoveries at Rs. 0.65 crores were less than Rs. 0.75 crore in the preceding year. The net
position was a surplus of Rs. 19.77 crores as compared to Rs. 2.28 crores in 1988-89.

The Packing Credit Guarantee continued its pre-eminent position accounting for
72% of advances covered and 75% of the premium income under all guarantees. The post
shipment Guarantee contributed 26% to the advances covered and 17% to the premium
income in this sector.

(ii) Guarantees- Project and Term Exports

Business under this sector showed an improvement in the year under report, in
terms of value covered. The value of risks covered rose to Rs. 195 crores in 1989-90 from
Rs. 164 crores in 1988-89, registering a growth of 48.63% on an annualised basis.
Premium income allocable for the year, however, declined from Rs. 6.71 cores in 1988-
89 to Rs. 4.88 crores (the accounting practice is to allocate the premium income
proportionately to the year years during which the guarantees remain in force). With very
high claim payments of Rs. 11.51 crores and a low recover of Rs. 0.41 crore, this sectore
of business showed a deficit of Rs. 6.22 crores as against a surplus of Rs. 6.71 crores in
1988-89.

Exchange Fluctuation Risk Cover

The scheme covering exchange fluctuation risk at bid and contract stages are
operated by the Corporation on behalf of the Government of India and the operational
gains or losses are transferred to the Market Development Fund administered by the
Ministry of Commerce. The Corporation receives only 5% of the gross premium towards
administrative costs.

Under this scheme which covers export receivable, one policy covering a Risk
Value of Rs. 69 lakhs was issued during the year. As at the end of March, 1990, 13
policies were in force covering a total value of Rs. 93.19 crores.

The scheme covering Exchange Fluctuation Risk on account of export-linked-

import-transactions, and advance payments for exports was suspended in January, 1990
pending review in the light of unsatisfactory experience gained in operating the scheme
since its introduction in September, 1988 At the end of the year, three policies were in
force covering a total Risk Value of Rs. 84.41 crores.

The total income for the year under both the schemes came
to Rs. 28.94 lakhs comprising premium income of Rs. 16.06
lakhs and exchange gains amounting to Rs. 12.88 lakhs. The
outgo was Rs. 8.33 lakhs, comprising Rs. 753 lakhs of claims
paid and Rs. 0.80 lakh being ECGC’s service charges, etc.;
 resulting in a surplus of Rs. 20.61 lakhs.

The cumulative financial result of the schemes from their inception upto 31st
March, 1990 was a net surplus of Rs. 214.91 lakhs.

Premium income

The total premium income for the year 1989-90 amounted to Rs. 47.46 crores as
compared to Rs. 35.42 crores for the year 1988-89 registering a growth of 67.47% on an
annualised basis. The main contribution to the growth came from Standard Policies and
Transfer Guarantees and Guarantees for short term exports. Premium from Standard
Policies and Transfer Guarantees rose from Rs. 8.59 crores in 1988-89 to Rs. 12.66 crores
in 1989-90, registering an annualised growth rate of 84.28%. Guarantees for short term
exports yielded a premium of Rs. 24.99 crores as compared to Rs. 14.5 8 crores in 1988-
89 registering a very impressive growth of 114.32%. Premium Income from Project and
Term Export Policies and Guarantees, however, declined from Rs. 12.25 crores jn 1988-
89 to Rs. 9.81 crores in the year under report, reflecting the sluggish conditions of India’s
export trade in this line.

Claims and Recoveries

The total amount of claims paid during the year came to Rs. 43.97 crores as
compared to Rs. 34.72 crores in 1988-89. As much as Rs. 24.65 crores was paid
as claims under policies for project and Term Exports. Claims under Guarantees
for long term Exports accounted for another Rs. 11.51 crorcs. Claims under
guarantees for short term exports came to Rs. 5.87 crores and for Standard
Policies and Transfer Guarantees Rs. 1.94 crores.

There was a significant improvement in the recoveries which amounted to Rs.

9.39 crores as against Rs. 4.79 crores- in 1988-89 evidencing the fact that the various
recovery steps initiated by the Corporation are bearing fruit. Of the total recoveries made
during the year, 77.53% was on account of Standard policies and Transfer Guarantees,
11.18% on account of policies for Project and Term exports, 6.92% on account of short
term guarantees and the remaining 4.37% related to long term guarantees.

Reinsurance
The Corporation has been reinsuring the political
risks covered by it with the Lloyds of London since the
underwriting year 1981. The reinsurance that corporation has
obtained, which is on an excess of loss basis, provides a certain
amount of protection to the Corporation when claims exceed an
agreed cut off point ant it is proving to be generally beneficial.
A claim of Rs. 0.44 crore pertaining to the underwriting year 1982 was
received during the year under report. No claim has arisen in respect of
underwriting year’ 1983 and onwards since the Ultimate Net Loss figures
were below the cut-off point for the respective years.

Foreign Exchange Earnings and Expenses

 Foreign exchange earned by the Corporation during the year came to Rs. 1.18
crores, comprising Rs. 044 crore of reinsurance claims received and Rs. 0.74
crore of interest received on claims recovery. Outgo of foreign exchange
amounted to Rs. 3.40 crores, of which reinsurance premium accounted for Rs.
3.13 crores, the balance being expense on account of member ship fees and
travel expenses.

Lesson 22
Import Management

In 1992, imports of goods and services into India ware valued at Rs. 50,000
crores, Merchandise imports exceeded exports. This flow of goods and services from
abroad provides a wide variety of critical materials, parts and products not otherwise
available. Additionally, the flow provides a basis for foreigners to pay for Indian exports
and provides a basis for foreigners to pay for Indian exports and provides Indian
consumers with a wider selection of goods from which to purchase. The import function,
however, often receives little attention because of the emphasis on the expansion of
exports, except when imports directly compete with domestically- produced products.
Despite the quantitative importance of the function and the critical need for imported
goods, the import function, remains little understood by many in universities,
governments, and businesses alike.
Importing refers to the purchase of foreign products for use or sale in the home
market. It involves searching foreign markets for acceptable products and sources of
supply, providing for transfer of the product to the home market, arranging financing,
negotiating the import documentation and customers procedure, and developing plans for
use or for resale of the item of service, Thus, Successful importing depends on more than
good buying; it requires planning for acceptance of the product and delivery of the
promised benefits. The importing firm has the responsibility to determine whether the
foreign product or service will meet the needs to the home market.

THE IMPORT PROCESS

Importing has been considered in several places in this text. The present chapter
service: (1) to organize the various aspects of importing by presentation of the import
process, (2) to describe major importing institutions, (3) to portray the problems
confronting Indian importers, (4) to elucidate major facets of the customs law and
procedure, and (5) because of its close relationship to customs arrangements. The
discussion should aid you in conceptualizing the import process and should provide a
somewhat different perspective on Indian commercial policy.
Earlier sections of the text presented many of the tariff, quota, exchange, and
administrative barriers to exporting. The usual interpretation is that such obstacles are
placed by foreigners against Indian exports. Now we need to take a closer look at some
barriers that foreigners meet in exporting to India, or otherwise stated, what are the
problems found by foreigners or Indian national in importing into the Indian market?
This chapter presents many such obstacles. Such inconsistencies in foreign commercial
policies are common. It is appropriate to anlyse the import system and to inquire into the
ramifications of the system with which importers must deal.

Essentially the import process comprise the following five stages:

1. Determining market demand and purchases motivation.
2. Locating and negotiating with sources of supply.
3. Securing physical distribution.
4. Preparing documentation and customs processing to facilitate movement
among countries and organisations.
5. Development a plan for resale or use.
1. Determining Market Demand and Purchase Motivation.
Importers can have a distinct advantage over foreigners in the home market,
because often they know or can more easily learn the requirements and nuances of the
market. They are closer to the market, may live there, and may be native to the market.
They are familiar with information sources and institutions. This knowledge can,
however, be a disadvantage when familiarity leads to carelessness and individuals assume
a level of knowledge that does not really exist. Enthusiastic exclamations of family and
friends over souvenirs from abroad are no substitute for careful market analysis. Studies
similar to those proposed in Chapter 8 or described elsewhere in standard marketing
research texts are needed also by the local importer to achieve realistic estimates of
market potential and as a basis for development of the promotional plan.
Raw material and component parts are imported for use by home country
manufactures in fabricating their own final products. The potential for such material and
parts is determined by the expected sales of the manufactures who use them. A careful
analysis of trade reports and business conditions will aid importers in determining the
market potential for both final products and components. Manufactures may not only buy
crude materials from abroad but may operate mines and processing plants abroad from
which they import to meet their requirements.
Affluence and the lifestyles of the population affect the level and types of
manufactured products imported by merchants for resale. Some equipment and supplies
are imported to facilitate and make more efficient our manufacturing, commercial,
educational, and governmental processes.

(2) Locating and negotiating with Sources of supply

Importers must develop dependable supply sources in order to assure customers
and themselves of their ability to deliver promised goods at the negotiated time and place
and in the correct quantity and quality. Various types of sourcing strategies are available
ranging form a constant scouring of the foreign market by the importer, resident buyer, or
middlemen to the ownership and control of supplying firms. The choice among the
various options is dependent on supply market characteristics, the product involved, and
the importer’s ability to finance and manage the operation.
The importer and the importer’s customers are interested in supply sources that
are capable for producing the quantities and the quality levels needed as well as having
financial stability and dependability. Where possible, sources should be operating in an
environment that is conducive to satisfactory future performance if the relationship is
expected to continue.
Product quality is partly a technical matter of specifications or conformance to
samples or description. It also has another dimension. Foreign products may be perceived
differently than local ones. Some foreign products from some countries may be seen as
being of higher quality than local products (e,g., cars) while other foreign products may
find it difficult to overcome an image of poor quality. The quality perception can change
over time, but importers should, at least, be aware of the potential differences perceived
by their customers.
(3) Physical Distribution
The logistics of supply, including delivery dates, transportation modes, inventory
policy, and claims servicing, may be the responsibility of either the buyer or seller or
both- and may be subject to negotiation. These considerations affect the ability of the
ability of the importer to deliver goods to customers or the assemble line on time and they
affect the final cost. Risk management policies will very with the negotiated results.

(4) Documentation
 Documentation is important in international trade. The distances between trading
partners and the sovereign rights of nations require more elaborate systems than those in
domestic trade. Each business person desires to protect a personal interest and each
nation wishes to be certain its laws are upheld, it revenues protected, and its sovereignty
maintained. Previous chapters have indicated some of the documents needed to support
these systems. The individual importer has little choice but to conform- at least in the
short-run. Failure to carry out documentation procedures can be costly and result in
nondelivery. Exporters who require irrevocable confirmed letters of credit will not ship
merchandise on revocable unconfirmed letters. Customs procedures are especially
relevant.

(5) Developing a Plan for Resale or Reuse

Importers need to have a plan for resale or use of the goods they buy Otherwise,
they may find themselves stuck with a product that doesn’t appleal to the local people or
does not necessarily fit the production and use systems of a specific business or
institution. It is advantageous, then, for the importer to have plan for convincing others of
the merits of a product or service. The distribution channels, promotional activities,
pricing, and financing should be organized for orderly and effective marketing because
selling in the home market may be even more competitive and difficult than in foreign
markets. There is no reason to expect that the majority of foreign products will sell
themselves any more than it would be true for domestic goods. Competitive products and
sources make a marketing plan necessary for successful selling if resale if resale is
contemplated.

TYPES OF IMPORTERS

Four basic types of importing institutions are found in most countries: private
industrialists, end users, government agencies, and facilitating agencies. These are
augmented by many agents of foreign suppliers.

(a) Private Industrialists

Private industrialists who buy and sell for their own account. There are numerous
private industrialists, some large and many very small. In Western countries these
industrialists may carry on a significant portion of the import business while in India, the
activities of industrialists are hampered by governmental attempts to achieve economic
development goals. Restrictions such as the following are not unusual:

Private industrialists are precluded from importing any item on the controlled list,
and they are often unable to get government approval to import on deferred payment
terms. For industrial raw materials, importation licensing has been liberalised by the
government of India.

(b) End Users

End users are manufactures, public-utilities, hospitals, colleges, universities etc.,
who buy for their own use. They purchase raw materials, supplies, machinery, and
equipment to facilitate their own operations and gear the level of their importing to their
expected level of operations. Imports of this group often constitute the major source of
imports for our country.
Traditionally Indian Industrial buyers purchased from abroad only when the
domestic suppliers could not service their requirements. Recently however, the growth of
multinational companies, improved transportation and communication, supply shortages,
and increased exposure to foreign firms have led to increased use of foreign sources.

The importation of goods form abroad has enabled many end users to gain the
advantages of technological developments abroad as the Europeans, Japanese, and others
have expended their research and development. Often goods are available at lower prices
than from domestic sources, thereby permitting domestic manufacturers to be more
competitive when they incorporate materials and parts in their final product. Importation
of products from subsidiaries abroad may lead to more efficient utilization of those palnts
due to greater volume. Furthermore, imports provide materials that are in short supply.

(c) Governmental Agencies

Governmental agencies constitute a separate class of importers because of their
operating characteristics, usually being subject to an extensive budgeting process,
detailed procedures for biding and ordering, and attempted close co-ordination with
governmental development and social plants. The exact role of governmental agencies
varies among countires.
In India purchases by government agencies and government-owned corporations
account for a large percentage of all imports. This is true of all developing countires
where the emphasis is on developmental plants and conservation of foreign exchange.

(d) Facilitating Agencies

(a) Clearing agents. For the routing associated with clearing merchandise through
customs as well as resolving controversies that may ensure, an importer may engage the
services of a customhouse broker. These intermediaries are experts in the complicated
paperwork connected with customs procedures. They often combine functions and serve
also as forwarding agents.
The clearing agent verifies the documents on shipments into India, sees to the
payment of duties and collects freight charges, and arranges for the shipment of goods
from ports to importers. Not only must broker have knowledge of documents,
classifications, and duty rates, but they must also be familiar with countervailing duties,
licensing requirements, trade mark restrictions, and controls set by other governmental
agencies. The customshoues broker is useful in expediting the shipment. For these
services brokers charge a service fee. The value of their services is indicated by the fact
that over 90 per cent of all imports are processed through customhouse brokers.

(b) Custom’s bonded warehouse, Importers may not always want to take
immediate possession of imported merchandise They can postpone the payment of duty
by storing dutiable imports in customs bonded warehouses where they may clean, sort,
repack and make certain change in the condition of merchandise.
Custom’s bonded warehouses are in the charge of a customs officer who, jointly
with the proprietor, has custody of all stored merchandise subject to detailed customs,
regulations. Imported merchandise may be withdrawn from the warehouse: (1) for
consumption (upon payment of import duties and accrued charges); (2) for transportation
and exportation; or (3) for transportation and warehousing at another port.

Indian Customs
The customs service of a country administers regulations governing the
movement of persons, ships, vehicles, and merchandise across national boundaries. In
line with this general statement, the primary activities of the Indian Customs include:
The assessment and collection of all duties, taxes, and fees on imported
merchandise, the enforcement of customs and related laws, and the administration of
certain navigation laws and treaties. As an enforcement organization, it engages in
combatin smuggling and frauds on the revenue and enforces the regulations of numerous
other governmental agencies.

Major Facets Customs Procedure that affect Indian Importers.

(1) Entry of Goods

Careful adherence to customs procedure is necessary if foreign goods are to be
brought into India. Among the first requirements is one that states the good must be
formally “entered” by the consignee. An entry is filed with the district customs collector
by submitting (1) a special customs, commercial, or pro forma invoice, (2) a bill of
lading, and (3) a declaration that prices and other data in the invoice are correct.
In the entry, the consignee declares the value of the merchandise, indicates the
rate of duty (if any) and tariff classification of the merchandise, and designates how the
goods will be disposed. If the goods are to be released from customs custody
immediately, a consumption entry is filed. In this situation a deposit is made with
customs equal to the estimated duty, and when the duties are finally determined, a refund
or an additional payment is made. A warehouse entry permits merchandise to be placed
in a customs bonded warehouse. This postpones the release of dutiable goods and
postpones payment of duty. Provision exists under Section 65 of the Sea Customs Act
and under Rule 191-A of the Central Excise Rules for the manufacture of goods under
Bond. This facility would enable the manufactures to take into bonded warehouse,
excisable material without payment of customs duties and indigenous excisable material
without payment of central excise duty, for use in the manufacture of a finished product.

(2) Dutiable Status

All goods imported into India are subject to duty unless they are specifically
exempted. In India, duties may be assessed on an ad valorem, specific, or compound
basis according to classifications and rates in the Tariff Schedules of India. If information
on the classification and rate for goods is desired, the importer may obtain it from the
customs service by furnishing the necessary information. The decision of the Customs
department may be relied upon as the basis for placing orders for goods to be imported.
These is no provision under Indian law for prepayment of duty or taxes prior to the
importation of goods as liability for the payment of duty is fixed at the time goods are
entered.
(3) Appraisal of Merchandise by Customs Officials

When a shipment is classified as dutiable, it must be appraised by customs

officials to determine the value for duty purposes. The importer is responsible for
ensuring that all the statements and the information in the documents field with customs
officials are correct to the best of the importer’s knowledge. If a package contains several
articles subject to different rates of duty, the assessment may be at the rate applicable to
the highest dutiable product in the package, but this assessment is usually avoided by
separating the different articles. This is another indication of how seemingly minor
variations can affect the final cost of imported goods.

(4) Valuation Basis

The basis used for valuation of an imported article in the appraisal process is
established by law. Indian customs valuation has been based on systems established
under Sea Customs Act, as amended:

(a) The transaction value is defined as “the price actually paid or payable for the
merchandise when sold for exportation to India, plus amounts equal to:

(i) The packing costs incurred by the buyer.

(ii) Any selling commission incurred by the buyer.
The value of any assistance (materials, tools, design undertaken outside India).

(iii) Any royalty or license fee that the buyer is required to pay as a condition
of the sale.
(iv) The proceeds, accruing to the seller, of subsequent resale, disposal, or use
of imported merchandise.”

If sufficient information is not available to establish transaction value of the

Imported merchandise, several other bases of value are prescribed, to be used in the
following order of preference.
(b) Transaction value of identical merchandise.
© Transaction value of similar merchandise.
(d) Deductive value to similar to previous Indian value).
(e) Computed value (similar to previous constructed value).

This new basis reflects the multilateral trade negotiations under GATT (The
General Agreement of Tariffs and Trade) in the so-called Tokyo Round. The Agreement
was negotiated because of dissatisfaction with the multitude of systems then in use. Many
of these valuation systems have protective features that can act as non-tariff barriers. The
Agreement establishes rules that seek to be more fair and to preclude the use of arbitrary
and fictitious customs values. Use of transaction values should enable the importer to
more redily determine the appraised value of imports, and appraisals should be more
uniform among importers.

Customs Rules Simplified

 Controversies over valuation, Classification, and other customs maters are
common; therefore, a procedure for resolution has been established. An importer may
protest a decision and get an administrative review by the customs authorities.

In a significant extension of liberalisation schemes, which the government has

been following over the past one year, government of India have simplified and
rationalised customs laws and procedures as pert of the liberalised economic, industrial
and trade policies of the government in June 1992.
The following is the gist of official announcement on simplification of customs
rules and procedures, both for goods and passengers.
- Self- assessment of import document by which importer of proven identity with
unblemished record of past conduct to self-assess the goods, determine duty
liability and disburse the duty.
- This is applicable to government departments and undertakings.
- Any breach of trust to attract penalty.
- Green channel for clearance of cargo under which cargo imported by persons of
proven identity with unblemished record as well as private sector units to be
cleared without scrutiny.
- Only 10 percent consignments to be selected at random for physical verification.
- Chemical test of samples to be extended to other institutes and laboratories in
view of the congestion in the central revenues control laboratory.
- The powers of assistant collectors and deputy collectors enhanced. Export
documents in certain prescribed categories not required to be put up to assistant
collector.
- Import document up to a value of rupees one lakh to be assessed by the
appraisers.
- Greater facility to imports through international courier service to be provided.
The level of duty cut and value up which the articles to e imported through
courier raised.
- Bonafide commercial samples restricted to Rs. 200 duty free imports allowed up
to Rs. 1300
- Passenger clearance rules simplified and inconvenience and irritants eliminated.
- Duty-free allowance to passengers enhanced from Rs 2000 to Rs 3000. This
includes those arriving from Sri Lanka and Maldives provided their stay abroad is
more than three days.

MAJOR CONCESSIONS IN CUSTOMS DUTY

In further bid to boost exports and bring tariffs down to international levels, the
government of India have announced major concessions in customs duty for capital
goods and their components.

The first notification prescribes a concessional rate of customs duty of 25 per cent
ad valorem or 15 per cent ad valorem on capital goods imported under the export
promotion capital goods (EPCG) scheme, subject to specified conditions.
 The second notification prescribes customs duty at a concessional rate of 15 per
cent ad valorem on components imported for the manufacture of capital goods to be
supplied to the manufactures- exporters under the EPCG scheme, subject to specifed
conditions.
The third notification fully exempts capital goods and components imported under
the scheme from auxiliary duty to customs.
According to the first notification, an importer undertaking an export obligation
equivalent to three times the CIF value of the capital goods over a period of four years
would attract customs duty at the rate of 25 per cent ad valorem.
Imports undertaking an export obligation equivalent to four times the CIF value of
the capital goods over a period of five years would have to pay customs duty at the rate of
15 per cent ad valorem.
Capital gods include plant, machinery, equipment or accessories required by an
importer for manufacture of goods and also machinery for packing goods, testing
equipment and equipment required for research and development activity.
The second notification prescribes a concessional rate of customs duty of 15 per
cent ad valorem on components imported for the manufacture of capital goods.
All such imports of capital goods and components have also been fully exempted
from the additional customs duties.

IMPORT PROCEDURE
Preliminaries
The first step toward the import of goods from abroad into India will be to set up
an establishment for importing things and secure recognition from the government as an
importer. A person or a firm can import goods only on the strength of an import licence
issued by the Controller of Exports and Imports. If the firm imported goods of the class in
which it is interested during the basis period prescribed for such class, it will be treated as
an established importer. In such cases, application can be made to secure a quota
certificate. For this the intending importer furnishes details of the goods imported in any
one year in the basic period prescribed for the goods together with documentary evidence
including the Bill to Entry/Postal Declaration forms and Customs Duty receipts with
relevant invoices and Bank Drafts/Chartered Accountant’s Certificates in the prescribed
from certifying the C.I.F value of the goods imported in the selected year. The quota
certificate entitles the established importer to import up to the value indicated therein
which is calculated on the basis of past imports. In case the importer is an actual user,
that is, one who requires raw materials, accessories, machinery, and spare parts for his
own use in an industrial manufacturing process, he has to secure licence through the
prescribed sponsoring authority which certifies his requirement and recommends the
grant of licence. The sponsoring authority for Scheduled Industries borne on the Register
of the Director-General to Technical Development have to move through the Director
General of Technical Development (Technical Cell), New Delhi, and others have to move
though the authority prescribed for them. Small industries (with a capital of less than Rs.
5 lakhs) have to apply for licence through the sponsorship of the Director of Industries of
the State where the factory is located unless some other authority is expressly prescribed
by the Government. For other categories of importers – (a) those importing against
exports made under a scheme of export promotion, and (b) other- licences have to be
secured from the Office of the Chief Controller of Exports and Imports. The import
licences are usually issued for a period of one year at a time.

Stages in an Import- Transaction

The following stages mark the various steps involve in importing goods into India
under an import licence and quota.

1. Placing the Indent

The importer places orders for the goods he requires, and for which he holds and
import licence. The order is called ‘indent’ and may be placed either directly or through
specialised intermediaries called “indent houses” The word “indent” is used for import
of goods, according to which two or three copies of the order are prepared and indented.
An ‘indent’ may be ‘open’ or ‘closed’. An open indent is one which does not specify the
price and other details of the goods ordered but leaves them to the discretion of the buyer
in the exporting country. A closed indent, on the order hand specifies the brand of the
goods ordered, the price at which they are to be purchased, and the details of packing,
shipping and insurance, etc. if indent specifies the price at which goods are sought to be
imported, it may give rise to negotiations between the parties. In such a case, the indent
incorporating the price finally settled is called a ‘Confirmatory indent’.
Though one can order goods directly, generally importers prefer to make use of
the services of indent houses for this purpose. The indent firms serve as middlemen
between the exporters and importers and charge a certain percentage of commission from
the importer. In Indian, many of the big indent houses have their officers in port towns
like Bombay, Calcutta, Madras, etc.
The Indent houses maintain close touch with the well- known foreign foreign
firms who send the samples of their products to them. Their salesmen take these samples
to the intending importers and book orders from them. The details of the orders taken
down by the salesmen in their note-books are entered in the indent form. Two copies of
the indent form are sent to the importer for his acceptance. The importer returns one of
the copies duly accepted and signed to the indent house which then sends a copy of the
indent to its agent in the foreign country concerned.
If an importer does not act through and indent house, he may place an order
directly with the exporter.

2. Obtaining Foreign Exchange

The foreign exchange reserves of any country are controlled by the Government
and are released through the central bank. In India, the Exchange Control Department of
the Reserve Bank of India deals with applications for the release of foreign currency.
However, an importer is able to get the foreign exchange only from an exchange bank
approved and recognised by the Reserve Bank of India for dealings in foreign exchange.
The importer has to produce the import licence along with the prescribed form for
securing foreign exchange required to pay for the goods ordered from another country.
The exchange bank through which the payment is proposed to be routed puts its
endorsement on the application form. On the strength of the application and the licence
and the exchange policy of the strength of India in force at the time of application, the
Reserve Bank of India sanctions the release of a certain amount of the desired foreign
currency. This paves the way for the importer to go ahead with the other formalities in
connection with an import transaction. It must be noted that while licence by the
Government for all imports during the period of its validity, exchange is released and
made available only for a specific transaction for which an order has been placed.

3. Arrangement for Payment

After the importer has succeeded in securing the requisite amount of foreign
exchange from the Reserve Bank of India, he has to make arrangements for paying for
the goods ordered. This may be done through an L/C where it is intended to enable the
shipper to obtain payment for the goods immediately on surrendering a documentary bill
to a bank in his own country.
Another method will be to request the exporter to forward the documentary bill
through his banker to the importer for being delivered to him either against acceptance of
the bill of exchange or against its payment. In such cases, when the shipper (exporter) his
shipped the goods, he sends an advice not to the importer stating the date of shipment of
goods and the probable date when the ship is expected to reach its destination. At the
same time he draws a bill of exchange on the importer (also called indentor) for the full
invoice value of the goods. Various documents like master document, insurance policy,
bill of lading and certificate of origin are attached to this bill. That is why it is called the
‘Documentary Bill”. A Documentary bill may either be D/A or D/P, i.e., the banker
through which it is sent may be instructed to deliver the documents against the
acceptance of the bill-by the importer or against the payment by him. ( D/A = Documents
against Acceptance; D/P = Documents against Payment).

The bank’s branch in the importing country, or its agent there, arranges for the bill
to be presented to the drawee (importer). The attached documents are handed over to him
immediately thereafter if it is a D/A bill; in case of a D/P bill, the bank delivers the
documents only after the importer pays the amount of the bill on maturity. Generally,
indent House is mentioned as the ‘Referee in case of need’ on the bill. In Case, the
importer cannot comply with the requirements regarding acceptance or payment, the
indent house does so on his behalf

4. Clearing the Goods

Assuming that the importer has taken possession of the various documents
relating to the goods shipped, he will have to comply with the formalities prescribed for
clearing the goods. When the ship carrying the goods touches at a port, it is notified in the
newspaper and the importer has to secure the release of cargo from the custody of the
customs authorities. The first thing for him to do is to obtain the ‘Endorsement for
Delivery’ Delivery or order on the back of the Bill of Lading which is the document of
title to the goods. The shipping company will make such endorsement only if is satisfied
that the freight has been paid. If freight has not already been paid by the shipper or
exporter, the importer will have to make the payment on this score before he can be given
a green signal by the shipping company. The importer then presents two copies of the
Port Trust Dues Receipt and three copies of the Bill of Entry to the Port Trust Office to
obtain clearance regarding dock dues, etc. Thereafter, one copy of the first form and tow
copies of the second are presented to the Customs office.

Bill of Entry The Bill of Entry, drawn in triplicate, attests the fact that goods of
specified quantity, value and description are entering the bounds of the country. Separate
forms of the Bill of Entry are used for each one of the three classes of good: (i) free
goods which are exempted from customs duty, (ii) goods for home consumption, and (iii)
bonded goods.

5. Payment of Customers Duties

if the goods are free, no import duty is to be paid at the Customs Office. On
dutiable goods, the importer or his agent will pay the import duty which may be
specified, i.e., based on weight, measurements, etc. it may be ad valorem, i.e., according
to the tariff value or the market value of the commodity or its invoice value.

Payment of customs duty can also be made under the system called the
“Permanent Deposit System” Under this system, an importer may maintain a running
account with the Customs office and make deposits from time to time. The duty payable
on a particular consignment of goods received at the customs is charged to the account
and the importer is informed of this.
In case the importer is not in a position to pay the customs duty on the whole of
imported goods, he may apply to the customs authorities to get them placed in the
‘Bonded Warehouse’ He can then pay the duty on each installment of good that he
withdraws from time to time.
To save themselves from the botheration of going through all the above
mentioned, the importers may entrust the job to clearing and forwarding agents. In such
as case, these agents will take it upon themselves to deliver the goods at the exporter’s
warehouse. Clearing agents charge commission for their services.

IMPORT PROCEDURE SIMPLIFIED

As per the new Import Policy 1992-1997 Import procedure has been simplified:

(1) Against seven application forms required for import of various items in the
negative list only on form will now be required
(2) Most of the imports are now free from licensing. However, where licensing is
required- cases like duty-fee imports for export production- considerable delegation of
powers has been made to the regional licensing authorities.

(3) Under the new procedure, import licences/ customs clearance permits will have
validity of 12 months. However, capital goods licences and customs clearance permits
will be valid for 24 months. Revalidation may be granted on merits.

(4) Other highlights of import procedures are: grant of licences for certain items of raw
materials, components and consumables in the negative list of imports, decentralised
application for second hand capital goods upto a CIF value of Rs. 50 lakh to be
considered by the regional licensing authorities;

(5) Imports though courier service upto a value of Rs. 5,000 at a time can be made in
accordance with the policy

(6) Licences for import of cloves, cinnamon and cassia to be granted to the extent of 10
per cent of best year’s imports in value in any of the preceding 5 licensing years, subject
to fulfillment of export obligations. Items qualifying for exports include tea, coffee,
tobacco and certain spices.

(7) Dealers of books may be granted licences on the basis of 20 per cent of the purchases
turnover for import of fiction and other books.

(8) Import of motor vehicles including tourist coaches and air-conditioning units will be
permitted within the entitlement of the licences given to hotels, travel agents and tour
operators.

(9) The import entitlement of any one licensing year can be carried forward, either in full
or in part and added to the entitlement of the two succeeding licensing years.

(10) A special licensing committee headed by the Chief Controller of Imports and
Exports may consider applications for advice on the grant of licence for import of
restricted items.

(11) Import of spares for imported motor vehicles and tractors upto a maximum value per
year of Rs. 20,000 (for motor vehicles) and Rs. 10,000 for tractors for each imported
vehicle can be made without a licence.

(12) Similarly, aircraft spares can also be imported without a licence on the basis of the
manual of the aircraft or on the recommendations of the department of civil aviation.

(13) Goods imported without restrictions may be transferred to others However, in the
case of gods imported with actual user condition can be transferred only with the prior
permission of the licensing authority.

(14) Import licences issued under various provisions of the policy will indicate the value
both in rupees and in foreign currency at the exchange rate prevailing on the date to the
issue of licence. No enhancement of rupee value will be necessary if the imports are
covered by the amount of foreign currency indicated in the licence.

(15) Authorised dealers of foreign exchange will indicate the value in foreign currency as
well as in rupees determined on the basis of the market and official exchange rate in the
letters of credit opened for import of freely importable items or the items proposed to be
imported against a licence.
Foreign Exchange and
Exchange Control
 The edifice of foreign exchanges arrests on the foreign trade as every transaction in
foreign exchange originates from foreign trade. In the world today it is frequent that the
product of one country crosses its border and money being a common medium, in which the
relative value of goods can be expressed, all claims for the value are settled by payment of
money. When the buyer in another country desires settlement of any claim he has to do so
either in his home currency or in the currency of the seller’s country or even in the currency of
a third country. If, for example, an American businessman sells to an Indian a machine, the
rupee in the possession of the Indian buyer will need to be exchanged into US dollars
demanded by his supplier for settlement of the transaction. Thus, every international
transaction involves an exchange of currency, which can aptly be described as a “coexistence
between internationalism of trade and the nationalism of currencies.”

Meaning of Foreign Exchange

Foreign exchange is a branch of economic science which seeks to deal with the
means and methods by which rights to wealth in one country’s currency are converted
into rights to wealth in terms of the currency of another country.1 Again, in the words of
Dr. Einzig, foreign exchange is the system or process of converting one national currency
into another and of transferring money from one country to another.2 According to Indian
Exchange Control, “Foreign Exchange” means foreign currency and includes all deposits,
credits and balances payable in any foreign currency, and any drafts, travelers’ cheques,
letters of credit and bills of exchange and promissory notes.3 To the holders of these
instruments mean a right to wealth.

Dr. Einzig refers them as foreign exchange (plural form to be noted), which are
“means of payment in which currencies are converted into each other and with which
international transfers are made, also the activity of transacting business in such means.”4

Foreign Exchange Market

Every deal in foreign trade is a two-way transaction, i,e., the buyer pays the
consideration money and the seller receives the value of merchandise sold. For this, the
buyer has to arrange for foreign currency (by converting his home currency) through his
bank, who asks his foreign branch or correspondent at seller’s place of domicile for
ultimate payment to the seller. In Other words, the seller obtains money form his bank
against shipping document, i.e., his bank buys, and the buyer of the goods to take
delivery of the shipping documents pays into this bank the equivalent value of foreign
currency, i.e., his bank sells the required foreign currency. Thus, the purchase and sale of
foreign currencies take place at two different countries. Therefore, to bridge the gap there
arises the need for a foreign exchange market, which plays the part of a clearing house,
through which the twin purposes of purchases and sales of foreign exchange are off set
against each other.
Through the modus operandi in international dealings in exchange between
different foreign centres is more or less uniform; the dealings between the banks and their
customers of between the banks themselves within the same markets are based on tow
different systems. In the UK, the USA, Canada, India, Switzerland and in some other
countries, the foreign exchange markets are not ‘markets’ in the concrete sense of the
term. They are really informal markets and not actual meeting places for the participants,
the buyers and the sellers. The term ‘foreign exchange market’ is applied in an abstract
sense only, meaning thereby a number of buyers and sellers systematically in contact
with each other for the purposes of transacting business in foreign exchange. Whereas, in
the continental sense, prevailing in France, Italy, Netherlands and Germany, etc., foreign
exchange market usually means a section of the Bourse (not connected with the dealing
of shares and stocks), where operators in foreign exchange meet on every business day at
a fixed time, in order to transact business and to fix official exchange rates.

The transactions in foreign exchange are effected, broadly at four different levels,
viz., (a) between the banks (who are authorised to deal in foreign exchange, i.e.,
authorised dealers) and their customers; (b) between the banks themselves in the same
market (i.e., inter-bank) at times supplemented by the central banks; (c) between the
banks and their branches in different foreign centres ; and (d) between the central banks.

The activities in first tow levels are, in fact, confined to the local or domestic
markets while the dealing at the other two levels are on international plane.

Means of Setting International Transactions

It has already been stated that a foreign exchange market plays the part of a
clearing house, while, similarly, banks (authorised dealers in foreign exchange) act as
clearing agents for international debts. The authorised dealers buy rights to wealth from
those who have them to dispose of and sell rights to wealth who wish to acquire them.

In practice, it is very much usual that when the exporter parts with his goods,
either he wants money immediately or wants to be sure that it will be paid at the pre-
determined date without any contestation. The importer, on the other hand, does not want
to pay the goods until arrival of the carrying vessel. This two-faced problem in all cases
is solved where both parties are favourable known to their own bankers. Depending upon
the terms of agreement, the exporter can draw on his counterpart, the importer, or on the
importer’s banks (or even on any third party) and hand the bill to his banker either for
collection (i.e. proceeds are received only after realisation from the importer) or he may
outright sell the bill to his banker.

It is not totally impossible that the importer, at times, remits to the exporter the
value of goods-maybe in advance or on receipt of advice of shipment from the exporter-
through the latter’s bank. The importer may also settle his obligation by a cheque on his
own bank or its correspondent either in the exporter’s country or in any other country.

The above methods of settlement of transactions arising form sale and purchase of
goods are common. Nevertheless, it should be borne in mind that when an exporter (c
reditor) has to draw a bill of exchange on the importer (debtor) he will ordinarily draw
the bill of exchange in any one of the following methods:
 (i) On the importer (may be under a letter of credit, if any);
(ii) On the importer’s bank under a letter of credit established by the same
bank;
(iii) On his own banks or any other banks in his own country under a letter of
credit opened by the importer’s bank; or
(iv) On a third country bank (Obviously a correspondent of the importer’s
bank) under a letter of credit established by the importer’s bank.

In whatever manner the buyer and the seller of goods agree to settle the
transactions, it will not be too much to say that in foreign trade payment for goods in
ultimately made between one bank and another.5 There is also a great volume of
transactions which does not result from commercial deals and the bills of exchange are
not indeed the means of settlement for such transactions, viz., exchange of service,
borrowing money from one another and paying interest on such borrowing, etc. These
can be settled by the use of various credit instruments, the buying and selling of which
are virtually the primary operations of an exchange dealer. The principal credit
instruments are:

(a) Telegraphic Transfers (TTs) or Cable Transfers: These are the

speediest mode of effecting remittances without involving any loss of
interest and the principal banking means of transferring funds in large
amounts to a foreign centre. The availability of sufficient funds at the
other end is the criterion for such remittances and, therefore, is
confined to banks and large commercial houses who maintain ample
funds abroad. The rate of exchange quoted by banks for such
remittances is considered to be the basic rate of exchange between
two currencies.
(b) MTs (Air or Sea-Mail):These are the orders for payment transmitted
by letter by banks, financial and large commercial houses, and
disbursements are effected either by payment of cash to a third party
or by credit to the account of the beneficiary (ies). Under this method,
the mechanism is similar to that of TTs except that the instructions to
pay to the beneficiaries are transmitted by mail (generally by air-mail)
instead of cable, consequently there occurs a time lag of some days in
each case before the relevant instructions are received by the paying
banks and the payments are actually effected. If the paying banks does
not have an account with the issuing bank the former remains out of
funds until it is re-imbursed by the latter’s correspondent. For that
reason the rate applied by paying bank is slightly inferior to that
quoted for TTs.
(c) Guaranteed Mail Transfer (GMT): This is a combination of the
qualities of mail transfer and cable transfer. It may also be called as
deferred cable transfer (or deferred TTs).
Before the airmail transfers developed, this system was in use and had
its utility as postal transit time was relatively more. Banks, after
dispatch of mil transfer, used to advice their correspondents by cable
 the issuance of such instructions and on receipt of the cable they could
pay on the stated value date irrespective of the date of receipt of the
relevant mail transfer. The value date, if fact, used to be future or
deferred date. With the development and popularity of airmail
services, the guaranteed mail transfer (or deferred cable transfer) has
lost much of its importance and is rarely used now as remittance
facility.

(d) Cheque or Draft: This is another means of payment of debts abroad,

or effecting remittances for any other purposes. The instruments are
ordinarily drawn on their own foreign branch or correspondent.
Although these instruments were widely used in the past for
settlement of debts, their popularity now –a – days is on the wane as
the risks of loss and delay in transit are there. The uses of cheques
drawn by firms/ companies on their account and sent abroad for
settlement of debts is however not totally absent. Cheques of this
nature are also purchased by dealers from the selected customers with
recourse to them.
(e) Circular Credits and Travellers Cheques: These instruments are
treated at sight basis by any bank (or travel agents handing banking
business) called upon to issue such instruments or to make payment
(encashment) against them. The issuance of such instruments in a
foreign currency is simply a sale of that currency against ready cash
and until the instruments are encashed abroad or the issuer’s account
abroad is debited, there is no outlay of fund. Therefor, there is a gain
of interest on the amount involved in the transaction. As and when
such instruments, expressed in ‘foreign currency, are encashed by a
bank abroad there is an actual outlay of funds by that bank and there
are also occurs a time lag to get the amount credited to its foreign
currency account abroad. As a result, the paying bank has to make
necessary provision for loss of interest in the rate of exchange
applicable for such transactions.

Accounts in Foreign Currency

While dealing in any transaction in foreign currency, be it a purchase of
commercial documents, retirement of a bill of exchange under a letter of credit or a
remittance, a bank must have accounts (normally current accounts) in foreign currencies
with its overseas correspondents through which the transactions in relevant – Currencies
can be put. The balances of such accounts – debit or credit – are taken into overall
financial position of the banks involved. These accounts are known as ‘Nostro’ Vostro’
and ‘Loro’ accounts.

‘Nostro’ accounts mean current accounts of banks maintained in the books of

their branches or correspondents in foreign centers in terms of the latter’s currency. For
example, in order to meet its requirements for transactions in pound sterling, ABC Bank,
Calcutta (an authorised dealer), maintains an account in pound sterling with its
correspondent in the UK, say XY Bank, London. Such an account would be designated
by the ABC Bank as its Nostro account with the XY Bank.

‘Vostro’ accounts are current accounts of foreign banks maintained in the books
of their correspondents in terms of the latter’s currency. The so- Called Vostro accounts
are the Nostro account of another bank involved.

Taking the example under ‘Nostro’ account above, the XY bank London will
refer the pound sterling account of ABC Bank, Calcutta, as ‘Vostro’ account. Similarly,
the XY Bank, to meet its requirements in Indian rupee, may maintain a current account in
Indian rupee with ABC Bank, Calcutta. This account will be designated by XY Bank as
its ‘Nostro’ account, while ABC Bank will designate it as XY Bank’s ‘Vostro’ account.

‘Loro’ accounts represent current accounts of third parties (banks) kept with
foreign correspondents in terms of either foreign currencies or in the home currency. In
short, these mean ‘third party’ accounts.

To explain the position, suppose, RS Bank, New York, also keeps a rupee account
with ABC Bank, Calcutta. A remittance in rupee made by the XY Bank, London, to the
ABC Bank for account of RS Bank will mean the proceeds of the remittance are ‘for
credit of Loro account’ of RS Bank. In the instant transaction, the XY Bank in their
correspondence with ABC bank will refer the account of RS Bank as ‘their account with
you’
The three types of accounts, in the light of the examples cited above, can be
summarized as under:

(i) ABC Bank’s account in pound sterling with XY Bank, London, is the
former’s ‘Nostro’ account and they will refer it to the latter as ‘our
account with you’.
(ii) XY Bank will treat the ABC Bank’s account with them as the latte’s
‘Vostro’ account and the former will refer it to the ABC Bank as ‘your
account with us’.
(iii) From the point of view of the XY Bank, London, the rupee account of Rs
Bank, New York, with ABC Bank, Calcutta, is the ‘Loro’ account and the
XY Bank will refer this account to the ABC Bank as ‘their account with
you’.

As and when there is a sale and purchase of a commodity and the settlement of
Value thereof has to be effected in a foreign currency, there arises the occasions of a sale
of foreign currency by a bank at buyer’s end, i,e., acquiring (purchase) of the foreign
currency by the buyer of the goods for payment to the seller and a purchase of the same
foreign currency by a bank at seller’s end, i.e., disposing (selling) of the foreign currency
by the seller of the goods. Even when the price is paid by the buyer in his home currency
and its remittance to the foreign seller, or credit of the amount to the seller’s account with
a bank in the buyer’s country, means the acquiring of right to wealth for he can at any
time withdraw the amount and utilise in the manner he likes, which, at some point of
time, means conversion of the amount into foreign currency. Therefore, the sale and
purchase of goods by traders at international plane give rise to buying and selling of
foreign currencies by banks at foreign centers. This affair of buying or selling, i.e.,
conversion of foreign currencies, is widely known as foreign exchange transaction. It
may be also noted that the buying and selling of foreign specialised job for allo
concerned including the professionals engaged in the foreign exchange dealings; the main
principles involved, however, can be easily understood by anyone interested in it.

Sale and Purchase Transactions: Two-In-One

It has already been stated that every deal in foreign trade is a two-way transaction,
i.e., the buyer settles the value by payment in his home currency and the seller received
the amount in predetermined currency (presumably in his home currency, which is a
foreign currency to the buyer of the goods). Thus, it needs a conversion of one currency
into another. Now let us take the example of the American businessman selling an Indian
a machine. Suppose, the value of the machine is S 500 and in order to pay the seller’s bill
the Indian buyer has to deposit an appropriate amount in Indian rupee (i.e., the buyer’s
home currency) which has banker will convert into U.S. dollars for remittance to the
seller’s bank in settlement of the transaction. Let us also take another case. An Indian
sells certain quantity of the jute goods worth of $ 1,500 to an American buyer. The
seller’s bank purchases the relevant documents and pays his customers an amount in
Indian rupee, equivalent of $ 1,500. This involves a conversion of dollar into Indian
rupee. Again, a foreign tourist encashes in a bank in India a travellers cheque for £ 10 and
obtains from the bank the proceeds in Indian rupees. Conversely, a bank in India issues to
his customer travellers cheques for £ 50 against rupees. In these twin examples, if viewed
from the angle of the bank, the former is case of buying of foreign exchange while the
latter is a case of selling of foreign exchange. If it is viewed form the customer’s point of
view, the former is a sale, while the latter is a purchase, of foreign exchange.

From the above analysis, we can conclude that to pay for the goods purchased
(imported) there takes place a conversion of home currency into foreign currency which,
form the bank’s point of view, is a sale transaction and to receive payment for the goods
sold (exported) there occurs a conversion of foreign currency into home currency which
is a purchase transaction in the bank’s book.

The analyses are reflected in the following chart which, if examined carefully,
will afford a clear understanding of the affair.

Foreign Exchange Transaction Involve

Export Import
(i.e., sale by trader) (i.e., purchase by trader)

Exporter receives home Importer pays in home currency to

Currency from Bank
i.e., sale of foreign (i.e., purchase of foreign
 currency by exporter currency by importer
which means) from bank which means)

Bank’s purchase of foreign Bank’s sale of foreign

Currency (i.e., conversion of currency (i.e., conversion of
Foreign currency into home home currency into foreign
Currency currency

The banks provide a service to their customers by converting foreign exchange

into vice versa. In a single day they will both purchase foreign exchange from some
customers and sell it to others. In orders to meet the needs of their customers, the larger
bank maintain deposits in branches of commercial banks abroad, while smaller and
inland banks work through these banks on a correspondent basis. The bank quotes rates at
which it will buy of sell foreign exchange. The rates will differ among the currencies,
thereby establishing the price of one currency in terms of another.

A distinction is to be drawn between spot and forward exchange. When an

importer purchases sport exchange. Actual delivery is taken of a definite amount of
foreign exchange at the time of purchase, and the rate then being quoted is paid for the
particular bill of exchange. When a forward exchange contract is purchased, the
purchaser agrees to buy a given amount of exchange on a fixed date in the future at the
rate specified in the forward contact, this future rate many be higher or lower than the
spot rate. The direction and extent of the deviation from the sport rate is largely governed
by two factors; (1) the supply and demand for delivery of a given currency at a future
time, and (2) the speculative opinion of the market concerning the future course of the
rate of exchange.

Factors Affecting Exchange Rate Fluctuations.

(A) Demand and Supply of Currencies Exchanged

Free or uncontrolled exchange rates fluctuate almost continuously, for they are
constantly subject to a variety of influences. If countries were still on the gold standard,
the fluctuations would be limited by the cost of shipping gold from one country to
another, but between these limits constant fluctuations could occur. In the absence of the
gold standard, gold embargos, currency inflation, or similar abnormal disturbing factors,
the fluctuations in the exchange rate are caused basically by the supply of and the
demand for the currencies being exchanged.

A maze of merchandise and other business transactions is constantly conducted

between India and foreign countries. These transactions influence the supply of and the
demand for foreign exchange.
 The transactions comprising the credit items (in-payments) of the India’s balance
of payments tend to increase Indian holding of foreign exchange and /or to reduce foreign
holdings of rupee exchange; the debit items (out-payment) have, of course, the reverse
effect.

The principal items that normally constitute the supply of foreign exchange in
India are exports, shares and bonds sold to investors abroad, foreign capital movements
to India, interest and dividend payments on foreign securities held in India, foreign
securities resold to foreigners, and payments due to Indian companies for shipping,
insurance, and other services. All of these items, require remittances to this country and,
therefore, result in a demand for rupees or a large volume o claims against foreign
currencies.

The principal items constituting the demand for foreign exchange are merchandise
imports into India, foreign shares and bonds sold in India, Indian securities bought back
from foreigners, interest and dividends on Indian securities held abroad, Indian tourist
expenditures abroad, and payments to foreigners for services.

(B) Other Factors

Foreign exchange rates, however, are not always dominated by these normal
forces of supply and demand. A number of other factors may cause people to lose
confidence in a currency and lead to a decline in its value. Loss of confidence may result
from:

(i) government instability:

(ii) large public debts;
(iii) high rates of inflation;
(iv) major industrial of banking failures, etc;
(v) At times speculative trading may also contribute to exchange fluctuations
even though speculators usually have stabilizing effect. However, if a
preponderance of them believe the currency is overvalued, they may all be
trying to sell at the same time.
(vi) Exchange rates also are influenced by the money markets in India and
foreign countries, because interest rates influence the flow of funds and,
consequently, the supply of and demand for foreign exchange, Rising
interest rates in India normally attract foreign bank funds to this country
and bring home Indian bank balances held abroad. The effect is to depress
exchange rates. Declining interest rates in India tend to reverse this flow
of bank funds and to raise exchange rates. Similarly, a rise in money rates
in a foreign money market normally tends to draw foreign bank funds held
in India and available Indian bank balance in the foreign market, while a
decline in money rates abroad tends to cause a reverse flow of bank funds.

It does not follow that every fluctuation in the money market will be
promptly reflected in foreign exchange rates. In the absence of exchange
 control or restriction plans, however, changing money rates frequently are
associated with fluctuation in foreign exchange rates.

Effect of Exchange Fluctuations.

When a seller quotes an export price for a product or receives an offer in terms of
foreign currency, there is concern with the exchange rate fluctuations that may occur
before the seller receives payment. When quoting prices in terms of the foreign currency,
the exporter knows how many rupees are to be received at the current rate of exchange.
However, when the customers pays in sterling pounds, deutsche marks, pesos, US
dollars, Japanese yen or some other acceptable foreign currency, the amount received in
terms of rupees will depend upon the rate of exchange when the currency is converted.
When the price is quoted in the foreign currency, the exporter accepts the risk of
exchange fluctuation. Unless steps are taken to protect expected profits, a decline in
exchange rates may reduce profits or even convert them into a loss.

Exporter’s Means of Protection

An Indian exporter can obtain protection against exchange losses by quoting a

price in terms of Indian rupees, thereby shifting the exchange risk to the foreign importer.
In that case, unless the importer seeks protection, an unfavourable change in the
exchange rate may cause the importer to pay a higher price (on the basis of his/her
currency) then had been anticipated.

When quoting prices in a foreign currency, an exporter may deliberately accept an

exchange risk if it is believed that the rate will be more favourable later, then the exporter
is speculating on the merchandise export transaction, for the amount of profit will not be
known until the payment has been converted to domestic currency. The exporter may be
more inclined to accept this if exchange rates have recently been quite stable and if a
product carries a wide price margin. Although the exchange risk may be taken into
account in quoting export prices, such action could raise the price and thereby limit sales.

(i) Agreed- Upon Exchange Rate. When exchange rates fluctuate

within a comparatively narrow range, the exporter may be able to
induce the foreign importer to agree upon a fixed or guaranteed
rate of exchange, but arrangements such as these may be
unbtainable at the very time the exporter is most anxious to protect
profits. When the exchange risk is greatest because of wide
fluctuations, the exporter who quotes foreign currency prices may
find that the only safeguard is in the open exchange market, where
foreign currency bills for future delivery are bought and sold.
(ii) Hedging. When an exporter makes a sale, foreign currency may be
sold for future delivery. Later, when a draft from the foreign
customer is received, the exporter will present it to a banker and
 receive payment on the basis of the agreed- upon rate. Thus, the
exporter has
A businessperson may hedge or protect export profits in a large measure by
selling future contracts, if there is a future market for the foreign currency.
When a sale is made, the exporter who expects to receive foreign currency at
some future date may sell an equivalent amount of foreign
Currency for delivery in future at the time the foreign currency is expected to be received
by the exporter. If the exchange rate declines, the exporter will receive fewer rupees for
the merchandise transaction than anticipated, hit will be able to cover or buy back at a
reduced rate the foreign currency that had been sold for future delivery. The profit
derived from this future exchange transaction will approximately balance the reduced
number of rupees the exporter is’ paid for the merchandise. In effect a fixed rate of
exchange will again have surfaced for the exporter.
The sale of future contracts often affords real protection to the exporter, but it does
not always eliminate the exchange risk entirely because the exporter may be unable to
close the export sales contract and sell the futures contract at exactly the same moment.
In the meantime the exporter bears the exchange risk. The futures and spot markets may
not fluctuate in the same amount, so the transactions exactly offset each other. Bankers
also have at times withdrawn from future exchange operations in some currencies, so
hedging may not be possible in currency. Hedging through the use of future contracts
implies that there is such a market. If the sale to a small country, or one with few
international dealings, there may be no future market for the currency.
Importer’s Means of Protection
Importers, when buying merchandise in terms of foreign currencies, are faced with a
possible loss of profit resulting from unfavourable exchange fluctuations. The importer,
knowing that a given amount of foreign currency will have to be delivered at a future
date, may purchase spot exchange when ordering imported merchandise. This will
eliminate the danger of a rise in the exchange rate in the importing country, but in doing
so the importer ties up funds until the merchandise is received. When purchasing imports
in terms of a foreign currency for which there is a market for future exchange rate, the
importer may hedge transactions by purchasing a future exchange contract. Thus, the
importer is assured that when the time comes for payment, the necessary foreign currency
will be available at a price determined when the future contract was purchased.
Indirect Risks
The most complete safeguard against unfavourable exchange fluctuations is, of
course, enjoyed by marketers when payment is to be made in their domestic currency, but
even then they have an interest in exchange fluctuations. Fluctuations following the
closing of the sales contract may be so unfavourable that the foreign customer may refuse
to accept delivery, or, having accepted the goods, may be unable or unwilling to meet the
financial obligation. Thus, the exchange rate fluctuations may increase the exporter’s
credit and commercial risks

The importer who has purchased foreign goods in terms of domestic currency
may have an indirect interest in exchange rate fluctuations because losses resulting from
exchange fluctuations may include the foreign seller to delay shipment or fail to make
delivery of the ordered merchandise. Although the importer will not make payment and
therefore will not suffer a direct loss from exchange rate fluctuations, business is
disrupted and, if any of the ordered items has been resold in advance of its receipt, the
importer cannot deliver.
Influence of Price Levels

If price levels could be promptly readjusted as exchange rates depreciate and a so-
called international purchasing power parity could be maintained, the depreciated
exchange would have little effect upon merchandise exports and imports. Such a prompt
readjustment, however, rarely occurs.

Exchange rates can depreciate very substantially,-even though the general

commodity price level within a country does not change. If a foreign currency
depreciated relative to the rupee while Indian prices remained stable, exports from India
would be handicapped. Indian prices, quoted on the basis of the current depreciated
exchange rate with a view to obtaining the number of rupees normally expected, would
appear high to the foreign importer in comparison with the general level of the domestic
prices prevailing in the other country and higher than the import prices that were formerly
paid.

If an exporter quotes prices in line with the domestic price level of the foreign
country, or if price offers from aboard are accepted on that basis, then the exporter would
receive fewer rupees than before the exchange rates depreciated. Imports received from
the foreign country would be encouraged because the importer could temporarily
purchase merchandise at prices that, in terms of Indian rupees, would be attractive. The
resulting decline of exports and increase of imports would eventually tend to readjust the
exchange rates because there would be an increasing demand for the foreign currency and
a declining demand for the rupee.

The exchange situation also is complicated by inflationary conditions. When

inflation occurs within a country, the prices of its products increase and, even if the
exchange rate does not change, exporters find sales more difficult. The increased cost of
imported items leads foreign buyers to other countries. Thus, the exporter whose products
are price-sensitive faces either a declining market or the need to cut the export price and
receive a lower profit. Anti-dumping laws in many countries might make the latter policy
unlawful.

Consumers and industries in the country with the inflated currency would find,
however, that the rise in internal prices has made importing more attractive. Lower prices
abroad, relative to the higher domestic prices, may lead to increased use of foreign
sources of supply.
The inflation thus affects not only the market for domestic and foreign goods and
services, but also the demand and supply for the currencies of the various countries. In a
fluctuating, or floating, exchange system, this should change the rate of exchange to
partially compensate for the shift to the use of foreign suppliers. In a managed currency
system, as under the IMF, inflation may result in a reduction of exports and an increase in
imports in the inflationary country. If this persists, it would pressure the country to
consider a change in par value, i.e., pressure to formally devalue the currency. By
devaluing the currency, the monetary managers want to make exports cheaper; therefore,
hopefully, the exports will expand and imports, now more expensive, will be reduced.
 Foreign Exchange Control
In today’s world nations are reluctant to have the value of their currency
determined solely by the normal supply and demand in order to facilitate trade and
investment. Monetary authorities intervene in the foreign exchange market either to
stabilize the value of the currency in accordance with arrangements under the IMP or
because of other trade and national goals. Furthermore, governments can restrict the
amount of exchange that is available for trade and investment and thus indirectly
influence exchange rates. Any governmental measures affecting the volume of exports
and imports influence exchange rates. A country may restrict the importation of certain
goods in conformance with its economic development programme in order to conserve
foreign exchange for projects with a higher priority. Furthermore, protective tariff rates,
import quota, licence requirements, export subsidies, governmental price control, and
trade agreements, all imply a certain amount of exchange control.

Direct Government Intervention

When countries suspended the gold standard in the 1930s they often took direct
action to change or stabilize exchange rates, thereby altering the market potentials.
Currencies were devalued in order to increase exports, stabilization funds were used to
buy and sell foreign currencies in the open market, gold exports were controlled, and
blocked accounts were used to overcome exchange rate depreciation problems.

Foreign Exchange Restrictions

Although the direct intervention methods referred to have influenced many

exchange rates, they do not fully serve the needs of countries with
a continuous shortage of foreign exchange. To supplement the direct measures many
countries adopted a number of exchange restrictions. Most countries have employed them
from time to time. Developing countries especially have found restrictions necessary to
secure compliance with their development plans.

An exchange restriction plan implies that the government of a nation restricts the
uses to which the available supply of exchange shall be put. Foreign exchange may be
allocated specially for the payment of import bills, interest on foreign loans, and on other
specific purposes. Sometimes the restrictions prevent the use of exchange for trade with a
given (unfriendly) country. In the latter case the purpose may be political, but the basic
reason for most exchange restrictions is the shortage of foreign exchange sufficient to
meet freely all of the requirements of international marketing and finance. More
specifically, exchange restrictions are designed:

(i) To provide the exchange necessary for the financing of essential imports and to
discourage specific imports that are considered to be luxuries or that may be available
from local producers.
(ii) To allocate or limit exchange for the servicing of exterlial debts and investments.
(iii) To prevent the flight of capital.
(iv) To limit speculation.
(v) To encourage lagging exports.
(vi) To encourage tourist travel.
 In addition to these objectives, all of which are primarily related to a shortage of
exchange, exchange restrictions also contribute to influencing or determining of foreign
exchange rates. When a government limits and prescribes the uses of all or most of the
available exchange, it fixes the nation’s official exchange rates. The exchange rates fixing
power of some government’s further enhanced by import quotas, licensing plans, and
other foreign trade control measures. This ability of a government to manipulate the rate
of its exchange can thus become an important instrument in the foreign commercial and
even political, policy of a country.

Administration of Exchange Restrictions -

In India exchange restrictions are administered through RBI. Exporters are
required to receive payment in foreign currency and turn over to the RBI all or such
portion of their exchange as the current regulations require at an official buying rate.
Importers and others requiring foreign exchange then purchase it, so far as the restrictions
permit, at an official selling rate.

In some countries there is also a free exchange market in which exchange derived
from certain exports or from other authorized services may be obtained, usually at higher
cost~ to the buyer. Thus, in a single country, there may be one or more pegged exchange
rates for official exchange and also a free market rate. This is known as a system of
multiple exchange rates. Multiple exchange rates are most likely to be used by
developing countries when a nation faces a shortage of foreign exchange.

Marketers are interested in these rates because the rate affects the price of, their
products. Multiple rates are established to inhibit the importation of specific products.
The least favourable rates are set for luxury goods such as automobiles, especially if
these are also produced locally. As the economy develops, the items might be shifted
from one category to another.

Other types of exchange restriction systems of interest to marketers include those

in which a country requires that a licence be obtained in order to import certain products.
These import licences are allocated by the exchange control authority in accordance with
priorities set by the government. Countries also have levied import surcharges and have
provided export subsidies to local producers. They have required that importers pay an
advance deposit for desired exchange, thereby tying up the importer’s capital and
increasing the cost of importing. In addition, various measures have been used to affect
capital movements.

Effects of Exchange Restrictions

Exchange restrictions, although intended to accomplish the internal objectives of

the country enforcing them, have necessarily affected the international trading of the
other trading nations throughout the~ entire world. As they are imposed primarily
because certain countries are faced with a shortage of foreign exchange, international
trading as a whole has not always been curtailed. But it is clear• that exchange
restrictions have:
(1) affected the importation of some classes of goods more adversely than others, the
essential character of imports being considered in the allocation of exchange;

(2) affected the trade of some exporting countries more seriously than that of others;
(3) tended, particularly in connection with certain international agreements, to channelize
trade bilaterally;
(4) been used by some countries for bargaining purposes;
(5) been utilized by some countries for the purpose of subsidizing particular exports;
(6) influenced domestic prices in some countries so as to handicap exports; and
(7) Complicated the routine work of importers and exporters.

Exchange restriction measures, however, also have certain desirable features under
conditions of serious and more than seasonal or strictly temporary exchange shortages.
Exchange restrictions have:

(1) stabilized exchange rates for both importers and exporters;

(2) aided various needy Countries in obtaining a larger supply of the commodities
considered most necessary by their governments; and

(3) enable debtor nations to safeguard their currency, control exchange rates in the
national interest, protect their economy to some extent against unfavourable commodity
price changes, regulate interest and other financial payments, and otherwise protect
themselves against threatening disturbances.

In general it is clear that marketing opportunities and efforts for specific firms have
been altered as a result of governmental Intervention in the exchange process. No
marketing programme is complete until it has taken into account the potential effect of
anticipated changes in governmental policies and rates of exchange.

David Carson, a student of international marketing, stated, “Foreign exchange or

political developments may often outweigh strictly marketing considerations in tipping
management’s judgments regarding certain market decision. Unfortunately, professional
literature in marketing has not adequately reflected these broader managerial
considerations.’

Floating exchange rates probably have not inhibited trade to the degree expected by
the proponents of fixed rates. They have, however, altered the conditions under which
international marketing occurs. Business have adjusted and have become better in
managing of foreign exchange. The larger multinational firms and commercial banks arc
improving their information systems for monitoring the foreign exchange market and
forecasting foreign exchange rates.

Exchange Control Regulations Relating to Exports

Section 18 of the Foreign Exchange Regulation Act 1973 forms the basis for
various regulations framed to regulate export transactions. In exercise of powers confered
in this section, the Government of India have issued two notifications on 1st January,
1974, one relating to exports by post and the other pertaining to exports otherwise than by
post. The Central Government have also framed the “FERA 1973” which also came into
force on 1st January, 1974.•These rules deals with the allotment of code number to the
exporter, different forms of declarations to be completed by the exporter; the prescribed
authority to whom the declaration is to be made, manner of realisation of exports
proceeds etc.
 Government of India issued a Notification in August 1983 amending the Foreign
Exchange Regulation Act 1973 when the export declaration forms were revised. Chapter
II of the Exchange Control Manual (1987 edition) published by the Reserve Bank of
India contains the various provisions to be followed by the authorised dealers as well as
exporters in matters relating to exports from India.
Under FERA it is obligatory for an exporter to surrender to RBI foreign exchange
earned through exports within 180 days of its realisation. It is essential for the
persons/firms/companies engaged in export trade to be aware of the relevant provisions
contained in this Act, Notifications and Manuals issued by the RB! (Government of
India) from time to time.

Recent Trends
Currently the balance of payments position facing the country had become critical
and foreign exchange reserves had been dcplcted to dangerously low levels. The export
momentum built up during the period 1986-87 to 1989-90, when India’s exports grew at
an average annual rate of 17% in terms of US dollars, was lost in 1990-91 when export
growth decelerated to only 9% in terms of US dollars. Export in April-May 1991 have
actually shown a decline of 5.8% in terms of US dollars compared with April-May 1990,
imports had to be severely contained in the course of 1990-91 because of the shortage of
foreign exchange. This effected the availability of many essential items and also led to a
distinct slow down in industrial growth.

Restoration of viability in our external payments situation is an urgent task and

requires action on several fronts. The government is of the view that Imports and Exports
(Control) Act 1947 and the orders thereunder require review. The present finance
minister is of the view that RBI should remove import curbs fully on the export sector.

FOREX SALE NORMS LIBERALISED

In a further liberalisation of the foreign exchange control regulations, the Reserve Bank
of India (RBI) instructed authorised dealers o sell exchange at market rate without its
prior approval to seven categories of people, including businessmen, exporters and
journalists.

Instructions had been issued to the dealers to increase from $100 to $500 the
existing ceiling on sale of foreign exchange in the form of currency notes to travellers
proceeding abroad.
These steps had been taken as part of the Liberatised Exchange Rate Management
System (LERMS), which came into effect from March 1, 1992.

The Foreign Exchange Dealers Association of India had been asked to instruct
banks that Foreign Inward Remittance Payment System (FTRPS) instruments should be
issued to resident beneficiaries immediately on receipt of relatives remittance up to Rs.
50,000 as against the existing limit of Rs. 10,000.

Under the new rules, authorised dealers can now sell foreign exchange without
prior RBI approval for business visits overseas sponsored by firms, companies and
organisations.

They can also do so in the case of visits by self-employed professionals and

journalists on short-term assignments.
 In these cases, the visit should be a single trip not exceeding 20 days and the
exchange availability would not exceed $300 a day.

The facility will be available for medical treatment abroad, subject to the
recommendation of the competent medical authority and to persons going abroad on
employment or emigration to meet initial expenses up to $500.
It will extend to persons going abroad on the hospitality of overseas organisations
up to S300 by way of incidental expenses and to exporters, by way of agency commission
not exceeding 13 per cent of the invoice value.
The new rules will also extend to exporters by way of settlement of quality and
other claims not exceeding 15 per cent of the invoice value and for sundry personal and
commercial remittances not exceeding Sl00 for any purpose.
Applications not covered by the authority delegated to authorised dealers would
be dealt with by the regional offices of the Exchange Control Department and in
approved cases permits would be issued by them.
In all these cases (including cases approved and covered by permits issued by the
RB!) foreign exchange would be sold by the dealers at market determined rates and
subject to payment of tax, wherever applicable.
Transactions of the official and free market exchange rates would have to be done
within the framework of the existing regulations.

For instance, a person wishing to travel aboard would be required to purchase

foreign exchange at the free market rate but only to the extent permitted under the
exchange control regulations.

The rationale for deciding that 40 per cent of export earnings would be converted
at the official exchange rate and the remaining 60 per cent at the market rate. This takes
into account the quantum of foreign exchange required for essential imports during the
coming year.

Further, this had not taken into consideration the expected boost in earnings from
exports and invisibles as a result of the liberalised economic policies.

The 40 per cent would not cover the government debt servicing needs, which
would have to be met at the market rates.

The new system, which replaced Exim scrips, would cover workers’ remittances
also unlike the earlier facility.

Initiatives have been taken by the government to deal with the third oil shock.
Briefly speaking, measures were introduced to reduce consumption of petroleum
products to contain the POL import bill. A set of measures were put in place to cut
government expenditure and, more particularly, its import and foreign exchange
component. Judicious import management geared to curtailment of non-essential/low
priority imports, without at the same time introducing sharp changes in existing policies
governing imports, was emphasised. Measures to generate additional exports were
initiated which included exports of surplus agricultural commodities and certain
manufactured items. Efforts were initiated to mobilise quick-disbursi4ig assistance from
bilateral and multilateral sources, accelerate the utilisation of the authorised but
undisturbed external assistance, tap surpluses in the oil-exporting Gulf countries and
attract inflow of resources through special investments, particularly from NRIs. Measures
were taken to raise revenue and improve fiscal balance of the government. Short-term
administrative measures were introduced to defer outflows and advance inflows in
foreign exchange. During the early months of 1991-92 initiatives were taken to lighten
the import regime and credit facilities for imports in the face of a worsening balance of
pa3lments situation.

Exchange Rate Adjustment

The Indian rupee is linked to a basket of important currencies of the country’s

major trading partners. The major objective of exchange rate policy is to adjust exchange
rates in such way as to promote the competitiveness of Indian exports in the world
market. Adjustments in the external value of the rupee are therefore made from time to
time. The Reserve Bank of India effected an exchange rate adjustment on 1 July, 1991 in
which the value of the rupee declined by about 7 to 9 per cent against the major
currencies (the pound sterling, the US dollar, the deutsche mark, the French franc and the
yen). There was another exchange rate adjustment on 3 July, 1991 in which the value of
the rupee declined by about 10 to 11 per cent against the major currencies. Between 28
June and 3 July, 1991, the rupee depreciated by about 18 per cent vis-a-vis the basket of
5 currencies while this basket appreciated vis-a-vis the rupee by about 23 per cent. These
adjustments had been necessitated by the growing external and internal imbalances in the
economy. The balance of payments situation had become very critical and that was
reflected in the sharp drawdown on, and low level of, foreign exchange reserves. Since
October, 1990 there has been an appreciation in the relatively high rate of inflation in the
country and a much slower rate of depreciation in the nominal exchange rate leading to
an erosion in the international competitiveness of the economy. It was equally necessary
to curb destablising market expectations which were generated by perceptions of a
growing misalignment of the exchange rate. It is expected that these exchange rate
adjustments will stop further deterioration in the country’s balance of payments in the
short run and. improve it in the medium term by improving the trade balance.

The primary objective of the exchange rate adjustment is one of strengthening the
viability of external payments position, i.e., to ensure that exchange rate movements
maintain a reasonable incentive for export promotion and encourage efficient import
substitution activities, and at the same time, to stem the flight of capital from India and
discourage how of remittances from abroad through illegal channels. In the immediate
short run, exchange rate adjustment is expected to facilitate realisation of outstanding
export receipts and accelerate, in general, the inflow of remittances by quelling
destabilizing market expectations. Downward adjustment in the exchange rate raises the~
relative price of traded goods (by increasing the domestic price of foreign currency) to
non-traded (or home) goods, thereby encouraging production of tradeables while
discouraging their consumption. This expenditure-switching effect at a macro level
results in correcting the imbalances in the trade and current account.

The real effective exchange rate (REER) of a currency which is the nominal
exchange rate adjusted for the relative change in prices in the respective countries, is a
proxy for a country’s degree of competitiveness in world markets. Appreciation in REER
reflects deterioration in the country’s international competitiveness, while depreciation in
REER reflects the converse.
 Many of India’s trade competitors made substantial exchange rate adjustments
over the past few years. China and Indonesia, for instance, depreciated their currencies
against the US dollar more than India did despite their lower inflation. Over the period
end-December 1980 to end-December 1989, China depreciated by 68 per cent and
Indonesia by 65 per cent while India depreciated by only 53 per cent against US dollar,
whereas the increase in consumer prices in China and Indonesia were lower at 100 per
cent and 111 per cent, respectively, against India’s 114 per cent over the same period.

Between October 1990 and March 1991 the REER of the rupee appreciated by
about per cent as a result of a much slower rate of depreciation in the nominal exchange
rate (2.4 per cent against the major five currencies over the same period) and the
widening inflation differentials as the country’s domestic inflation accelerated after
October 1990. Further, in the five month period between February 1991 and June 1991,
the nominal effective exchange rate of rupee decreased only by 2.5 per cent while the
inflation differentials continued to widen. All this resulted in an erosion of India’s
international competitiveness.

To restore the competitiveness of our exports and to bring about a reduction in

trade and current account deficits, a downward adjustment of the rupee had become
inevitable. The Reserve Bank of India effected the exchange rate adjustment in two steps
in early July 1991. The timing of the exchange rate adjustment was necessitated by the
need to nullify adverse expectations and restore international confidence. On the other
hand, the magnitude of the adjustment was predicted on the need to restore
competitiveness of the country vis-a-vis her competitors in trade. On July 1, 1991 the
value of the rupee declined by 8 to 9 per cent against the major currencies (pound
sterling, the US dollar, the deutsche mark, the yen and the French franc). On July 3, 1991,
the value of the rupee was further lowered by 10 to 11 per cent against the major
currencies.

In determining the extent of adjustment, the relevant factors were:

differentials in the price levels between India and her major trading partners; the extent of
real depreciation of the currencies of competitors; the degree of correction required in our
balance of payments; and market expectations. Taking all these factors into account the
magnitude of downward adjustment in the external value of the rupee by about 23 per
cent was appropriate.

A basic requirement for the success of this policy is that relative price change
should bring forth requisite change in production and consumption patterns. Exchange
rate depreciation could lead to an improvement of the current account only if export volumes
rise and/or import volumes fall sufficiently to outweigh the price effect. Besides, lags in such
response to exchange rate changes are also to be reckoned with. There is the well known
“J curve” effect of the improvement in balance of trade occurring after an initial
deterioration. However, following the stringent monetary restrictions on imports, the
expected deterioration of trade deficit did not happen. The trade deficit during the first six
months of the financial year 1991-92 contracted significantly.

UNCTAD Advises Against “Big Bang” Approach

The United Nations Conference on Trade and Development (UNCFAD) had
advised developing nations with moribund economies not to go in for “ultra shock
treatment” of sweeping reforms as it would lead to increased political resistance and
possibility result in its reversal due to foreign exchange constraints.

“The evidence suggests that a more traditional sequencing is preferable to the

current inclination to mix together stabilisation and structural reforms.”

The “traditional sequencing” model presumed that macroeconomic stability —

reflected in moderate inflation — was ensured before launching structural changes,
including trade reforms.

However, the”big bang” approach, — described as the ultra shock treatment by

UNCTAD -— prescribed simultaneous introduction of major stabilisation policies and
structural reforms.

The experience of developing Countries in the eighties supported the view that
macroeconomic stability was a necessary condition for successful structural change and
economic growth. Microcconomic instability was characteriscd by constant changes in
prices, economic policies and the possibility of profiting from speculation on changes in
short term conditions. “This is not an appropriate environment for investment and
growth.”

Growth was unlikely to he resumed unless microeconomic stability was

guaranteed. At the same time, experience had also shown that macroeconomic stability,
while necessary was not a sufficient condition for economic growth.

Don’t Make 90s Another Lost Decade

The current turmoil in European currencies provides a sobering lesson for

developing countries. It has shown how the market can reduce governments to mere
spectators while bankers make billions.

The monetarism and free market philosophy that characterised the 1980s seem to
have failed. Eastern Europeans are now finding out what many in Third World know
from bitter experience: that the market is not the global panacea.

The recession, the most severe since World War II, has wrecked the world
economy, and, what is worse, there are few signs of recovery. The world economy is in a
“danger zone” due to the policies of the 1980s. The production has fallen in the USA and
stagnated in Western Europe and Japan. Post-Communist countries in Eastern Europe and
the former Soviet Union have found that under capitalism living standards have actually
fallen. Industrial and farm production have declined and trade flows have been disrupted.

In the Third World, Africa and much of Asia face economic stagnation. However,
growth has picked up in Latin America and East Asia. For the first time in many years a
positive net transfer of resources has taken place in Latin America. It remains to be seen
how long it stays that way. In Africa poor export earnings have compounded the
problems faced by the IMF-dictated structural adjustment programmes.

Commodity prices declined by 11 per cent in 1991. Prices of coffee and cocoa,
Africa’s two key export earners, are currently at their lowest level in 17 years. A number
of countries also have severe drought.
 Despite recession in the North, some Third World countries have been able to
maintain high growth rates. Import capacity of some Asian countries rose by 15 per cent
and in some Latin American countries it rose by 10 per cent, at a time when imports of
industrial countries were growing by only 1.5 per cent.

Banks are less willing to give loans because of their losses. This “debt deflation”
in the world’s major economies has prolonged the recession.

Third World growth depends on the economic health of the industrialised world.

Keynesian policies of “raising government spending to stimulate private

consumption and investment demand may be desirable and make fuller use of productive
capacities.”

“A private sector weighed down by debt and high long-term interest rates will not
generate stability or growth unaided. Governments must resume their responsibilities, by
acting to foster a return to financial stability and to stimulate the level of economic
activity.”

Export-oriented growth is necessary for the Third World, but the industrialised
countries must relax their import restrictions
The trend towards greater openness in developing countries has been
accompanied by more, not less, protectionism in developed ones.

A successful conclusion to the stalledGATT (General Agreement on Tariffs and

Trade) talks on world trade is needed to stimulate global trade.

The experience of developing countries in the 1980s suggests that liberalising

trade can have a destabilising effect if the economy has insufficient foreign exchange to
finance an adequate level of imports, because it may need to be accompanied by sharp
devaluation.

Developing countries which have rapidly liberalised their economies could face
political instability, especially those with fledgling democracies.

The developing countries being forced by the IMF and the World Bank to
“reform” their economies under structural adjustment programmes should exercise
caution.

Gradualism is watchword.

Recommend

A phased approach is recommended whereby economic stabilisation comes first

and structural reforms are implemented in a gradual sequence.

More generous debt relief for the poorest countries is needed. In 1991, total long-
term debt of developing countries was $ 1,000 billion.
 Without urgent policy measures the world economy will continue to stagnate. For
global growth “1980s thinking should not be allowed to stand in the way by producing
another lost decade.”

Table 10.2
Exchange Rate of Rupee Vis-à-vis Selected Currencies of the World
Year US Pound Deut-- Yen French Candia Italian SDR Turkish Indon- Brozi-- Mexicn Korean Pakis-- Thil-
Month Doll-ar Sterling she France n Lira Lira esian lian Pesos Won tani and
Mark Dollar rupiah Cruz- Rupee Bhat
ados
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1980-81 7.908 18.500 4.188 0.037 1.800 6.720 0.009 10.178 0.096 0.012 0.137 0.343 0.011 0.805 0.388
1981-82 8.968 17.110 3.861 0.039 1.570 7.457 0.008 10.335 0.074 0.014 0.085 0.340 0.013 0.899 0.403
1982-83 9.666 16.136 3.960 0.039 1.425 7.810 0.007 10.563 0.056 0.014 0.046 0.152 0.013 0.792 0.422
1983-84 10.340 15.417 3.940 0.044 1.299 8.343 0.007 10.941 0.042 0.011 0.015 0.076 0.013 0.788 0.452
1984-85 11.889 14.867 3.988 0.049 1.301 9.007 0.007 11.933 0.030 0.011 0.005 0.061 0.015 0.830 0.485
1985-86 12.235 16.847 4.555 0.056 1.491 8.889 0.007 12.923 0.022 0.011 0.002 0.038 0.014 0.777 0.461
1986-87 12.778 19.072 6.297 0.080 1.929 9.309 0.009 15.447 0.018 0.009 0.874* 0.018 0.015 0.764 0.494
1987-88 12.966 22.087 7.400 0.094 2.203 9.914 0.010 17.121 0.014 0.008 0.270 0.008 0.016 0.752 0.515
1988-89 14.482 25.596 8.049 0.113 2.370 11.960 0.011 19.262 0.009 0.009 1.292 0.006 0.021 0.791 0.575
1989-90 16.649 26.918 9.092 0.117 2.680 14.093 0.012 21.368 0.008 0.009 6.360 0.006 0.025 0.800 0.651
1990-91 17.943 33.193 11.435 0.128 3.387 15.442 0.015 24.849 0.007 0.010 0.203 0.006 0.025 0.827 0.710
1991-92
April 19.837 34.733 11.622 0.145 3.450 17.210 0.016 26.949 0.005 0.010 0.079 0.007 0.028 0.877 0.792
May 20.537 35.427 11.954 0.149 3.528 17.864 0.016 27.634 0.005 0.011 0.076 0.007 0.028 0.888 0.827
Dec. 25.875 47.254 16.551 0.202 4.841 22.598 0.022 36.398 0.005 0.013 0.027 0.009 0.034 1.071 1.042

(Rupees per unit of foreign currency)

* On February 28, 1986 the Cruzado, equal to 1000 Cruzerios, was introduced. On
January 15, 1989 the, new Cruzado, equal to 1000 old Cruzados was introduced.