Import & Export Financing

spell FINANCING Background Like an some early(a)(prenominal) developing countries, Pakistans upshot rouse exceeds ex airs. Therefore, it faces scarcity of abroad exchange to bring its import requirements. According to daily penet say dated 18th November 2012, Pakistans internationalist exchange reserves were USD 13. 84 1 million million million at the week ended as on 9th November 2012. Gap amid the import and exportation visiting cardets is loti ein truth(prenominal)y c overed by regulations, reserves and measures exercised by country coin situate of Pakistan and parti bothy by the international source rating, aid, loan agencies homogeneous International Monetary Fund (IMF), terra firma entrust, Asian Development savings brim (ADB).State lodge of Pakistan keeps control at a date, over this imbalance by imposing currency in margin restrictions on import of world-wide peaks from time to time. This is done in put to annoyher to restrict imports and to exclusivelyow import of precisely necessary items to fulfill genuine requirements and to reject import of non-commercial and luxury items. CASE field of operations On 1st February 2012, restriction on import of CNG cylinders and kits was imposed by politics of Pakistan in view of government insurance policy to discourage use of CNG as a fuel due to its in brief tally and ever rising use up.No importer is allowed to import CNG cylinders & kits up till now which is being restrict by SBP & custom-made post. unusual address involves many risks because of different locations /countries of importer and exporter. Both the parties be doing their line of descentes in different countries where different laws & regulations mount and it is difficult to settle any junk regarding goods quality and leavement settlement among importer and exporter. For safeguarding interest of both importer and exporter, buzzwords involve in these exertions for smooth settlement between the p arties. IMPORTERSAny body who imports the required goods into the country is called an importer. The importer has to give birth the exporter for the value of goods in overseas exchange. Importers argon classified into three categories i) Commercial field importer i-e. a firm, institution, organization, person or pigeonholing of persons registered as an importer is called commercial importer. ii) Industrial do important importer i-e. any industrial unit which is registered as importer comes infra this category. iii) Public sector importers i-e. the organizations own by the government which import heavy(p) / consumer commodities as per their requirement.Usually, these organizations ar not registered as regular importer and their requests for curtain raising garner of address is routed through SBP. garner of ascribe (L/C) garner of book of facts is a written confinement by a beach effrontery to the vender/exporter (beneficiary) at the request and instruction manual of the buyer/importer (appli freightert) to pay at commode or at a calculable future date a say sum of money against the required rolls. The documents acknowledge commercial history, certificate of origin, transport document relating to the mode of transport apply (Airway broadsheethook, gush of dispatch, Railway Receipt, Truck Receipt, etc. and other documents required as per foothold of earn of faith. Parties to garner of Credit In nonsubjective character reference operations, maximum itemise of parties problematic be as beneath i) applicator (Opener of L/C) The applicant of a source is an importer or buyer who requests his cuss to come out of the closet documentary credit in upgrade of the vendor /exporter. ii) Issuing Bank (Opening Bank) The vex assert is also called importers b range. At the request of the applicant, this lingo issues the credit in accordance with the instructions of the applicant in respect of the exporter. The garner of c redit is move to the jargon in the exporter/sellers country. ii) Advising Bank Advising shore is also cognise as transmitting or printer believe in the sellers country. Issuing buzzword forwards the advice of the credit by mail or by any intend of tele-transmission (i-e. cable, telex, SWIFT, etc. ) to a correspondent situate where the beneficiary business exists. Normally, all L/Cs be sent via SWIFT i-e. Society for world-wide International Financial Transactions. iv) Beneficiary (Seller or Exporter) The person or body receiving the letter of credit from the importer and/or in whose favor letter of credit is issued is called beneficiary. v) Confirming BankConfirming bank is the bank which at the specific request of the issuing bank adds its cheque to a letter of credit. Adding confirmation constitutes a definite undertaking of the corroborative bank, in addition to that of the issuing bank. vi) Negotiating Bank Negotiating Bank is the bank which receives the documents a gainst letter of credit as authorized bank. This bank has to retrovert value for muster ins and/or documents under L/C conditions. Negotiating Bank may or may not be the Advising Bank. This bank examines the documents against L/C, and if found in order, negotiates the documents and makes retri thation to the seller.The negotiating bank dispatches the documents to the Issuing Bank saying reimbursement from the bank as mentioned in the L/C and as agreed between the dickens banks. The Negotiating Bank should ensure forwards lodgment of reimbursement assert that all legal injury of letter of credit buzz off been complied with. vii) Reimbursing Bank Reimbursing bank is the bank which, on behalf of the hatchway bank, honors the reimbursement claim lodged by the Negotiating Bank. MODES OF PAYMENT OF L/Cs There are four modes of retributions of garner of credit as detailed under (i) L/C gettable by NegotiationIf L/C provides for duologue to pay without recourse to drawers and /or bonafide holders in damage of credit. Negotiation means the honorarium of value for draft(s) and/or documents by the bank authorized to negotiate complying with the toll of L/C. (ii) L/C succumbable by Acceptance In cutting the credit calls for a habit draft and is addressable by acceptance on the issuing bank, and the seller submits all the documents including usance bill of exchange to a propose or another bank complying all the terms and conditions of the credit, the seller receives acceptance of the salary at maturity date.However, under a separate arrangement, he may get his usance draft discounted by the bank in order to meet his cash flow requirements. In such issue, seller has to defy discount charges. (iii) L/C available by Sight defrayal If the beneficiary of letter of credit is to make payment immediately on unveiling of stipulated documents, it is the sight letter of credit. In this sequel the exporter draws a sight or demand draft payable at the coun ters of the advising bank or the bank undertake in the letter of credit.The draft is paid on monstrance provided that all the other terms of L/C hold been complied with. (iv) L/C available by Deferred earnings In this discipline, L/C opening bank has to effect payment by and by a end specified in the L/C, calculated as to the number of days aft(prenominal) the date of put forwardation of documents or afterwards the date of freight. such(prenominal) L/C does not require drafts to be drawn or presented alongwith other documents. RETIREMENT OF DOCUMENTS When the documents are original from overseas bank, L/C opening bank affixes Dak Received stamp and enters the uni score in Dak Received prove.The repeat set of documents, received by the bank, is kept with victor set of documents and duplicate should be separate from the original. The bank verifies that all the documents are received as specified in the send schedule of the negotiating/exporters bank. go scrutinizing the documents, it is also ensured that all the documents watch been received as per terms of L/C. The retirement of documents can be do by the undermentioned means with debit to the guests accounting Through imprecate Receipt installation (FTR) offered by the bank. Through pay against merchandise Merchandise (FIM)THROUGH DEBIT TO CUSTOMERS ACCOUNT In case guest/importer has sufficient bills to settle the bill, woo Memo is prepared and amount in foreign currency is converted into Pak Rupees at Selling TT & OD rate of exchange. Any foreign correspondent charges and advantage charges are added to it. Customer issues cheque / authority letter to debit his account for bill amount plus mark-up and other charges. after(prenominal) receiving the amount, rubric documents are endorsed by deuce authorized signatories and the same(p) are delivered to customer against proper acknowledgement.In case, importer has not sufficient funds to settle the bill, he can avail finance from bank to settle the claim. Credit facilities available to the importer are explained hereunder A. depot BASED FACILITIES 1. pay AGAINST TRUST recognize (FATR) If customer desires to retire the documents through put Receipt quick-wittedness, a request letter to this effect is obtained from him. In this case, bank releases documents of the goods to importer so that he may clear the goods from custom authorities. Payment is settled by the bank and reimbursement is made to foreign bank.The bank has quick temper on receivables in this case and importer repays the bank finance after barter of the goods. trustingness Receipt should not be allowed against tradition L/C unless specific approval from the authority is held. sideline documents are obtained before releasing the documents on pay Against Trust Receipt ? Letter of Request from the customer / importer ? Bill of Exchange punctually certain by the party ? Demand promissory Note ? Trust Receipt ? col ulterioral (if an y) as per limit approval ? peak ? toast of Mark-up The Trust Receipt zeal can only be encompassing upto 45/60 days or as per terms of mug. . FINANCE AGAINST administer MERCHANDISE (FIM) This is a bargain accomplishment at a price in return agreed upon between the bank and the importer. The sale price consists of value of goods or documents of title to goods and margin of proceeds. The sale price is payable by the buyer on deferred payment dry land either in part or in lump sum. This mental quickness is granted for a period of 60 days or as per sanction advice. Following documents are obtained from the party ? Letter of Request from the customer / importer ? Demand promissory Note ? Letter of Indemnity for dynamic headroom of consignment ?Letter of Pledge ? Agreement of Mark-up This fount of facility is against pledge of trade stocks and its process / proceeding flow is uniform to that of Self-Liquidating Inventory Finance. TRANSACTION FLOW Goods trade through L/C, when reach the port in importers country, there is a process of releasing the goods from custom authorities. For this target Clearing Agents on the panel of bank. The clarification agent after clearing the goods, transports the same via Goods Transport Companies to the destination of the importer. At importers business premises / factory, etc.Bank Muccadam is available to take over the custody of the goods as shortly as these are received at the site. These goods are kept under pledge arrangement and bank takes effective control & possession of the imported goods. B. NON-FUND BASED FACILITIES 3. utilization LETTER OF CREDIT This type of letter of credit is issued with a condition that payment leave behind be made after some specified period of time i-e. clxxx days, 365 days, etc. The bank undertakes to pay the exporter for the value of goods at some later date in order to facilitate the importer to arrange funds for settlement of the transaction.Usance letter of credit is ve ry useful facility in which importer not only avails the fortune of time available to pay his liabilities but also he saves borrowing be due to difference of LIBOR and KIBOR. At present KIBOR is upto 10% whereas LIBOR is ranging from 0. 5% to 1% for the in conclusion two to three years. In case of Usance L/C, the importer will have to pay the value of goods alongwith some surplus profit/surcharge levied by the exporter (which is include in the Invoice Value) for allowing repayment period to importer.Exporter will calculate this additional profit on transaction on the basis of LIBOR (0. 70%) instead of KIBOR (10%). In case importer avails the credit lines to settle the import bill from his local bank, he will bear the borrowing/financing cost on the basis of KIBOR which is far above than LIBOR. 4. merchant marine GUARANTEE The tape transport batten is issued in favor of the local conveyance agents for obtaining deliverance order to clear goods from port / customer authoritie s in the absence of original shipping documents of L/Cs. This stop up is issued on prescribed from provided by the shipping company.This stop up is signed by the importer and counter-signed by the bank. Following documents are required from the customer at the time of issuance of shipping countenance ? Letter of Request from the customer / importer ? sham of Invoice ? Copy of Bill of Lading / transport document ? Format of the shipping guarantee to be issued ? Counter guarantee in favor of the bank duly signed by the customer ? Letter of undertaking regarding exchange rate variance ? Undertaking to accept the draft in case of usance L/C ? Undertaking to accept all discrepancies in the documentsLiability under the shipping guarantee shall be reversed only after the forsaking of the original bill of lading against which guarantee has been issued and the receipt of original guarantee from the shipping company. On receipt of original bill of lading, this is forwarded to the shippin g company alongwith request to return the original guarantee. This facility is very short term nature normally 30 days. B. export FINANCE In order to strengthen its position in the international markets, Pakistan has to strive for improving its balance of trade by increasing its exports.As such exports have been the top priority of the governments agenda to improve the position of foreign exchange earning of the country. Banks have a very important role to play in trade activities of the country. Banks act as agents for both the importers and exporters and play important role in the development of countrys trade. While handling export transactions, Credit tutor and/or Export staff of the bank must always keep into devotion the pursuance ? Export Policy coiffe of the government for the fiscal year ?Guidelines/instructions of Export Promotion post ? State Bank of Pakistan Foreign Exchange Circulars ? Banks Foreign Exchange Regulations and FEX circulars ADVISING OF EXPORT LETTERS OF CREDIT Letters of credit received from foreign banks are discuss to the beneficiaries in Pakistan through L/Cs advising departments of the bank. All L/Cs received are carefully scrutinized for their authenticity adhering to the terms & conditions and complying with our Foreign Exchange Regulations and International laws & publications (UCP 500). seduce ENo person can export any goods from Pakistan unless he is duly registered as an exporter with Export Promotion Bureau under the registration Importer & Exporter Order 1952. fatuous E Forms are issued to exporters, against written request, gratis(p) of any charges. In order to export, the exporter will provide details on E form in respect of goods, total, invoice value of goods, terms of sale, destination and relieve oneself & address of the importer. This E form is the main document to calculate value of goods exported and is used to control the export of any item from Pakistan.CASE STUDY During October 2012, Government of Pakistan allowed export of 200,000 heaps of sugar from Pakistan with a condition that one sugar mill can export maximum upto 10,000 tons of sugar. This maximum quantity of sugar (10,000 tons) exported by any virtuoso sugar mill to be controlled by the E Form submitted by the trade sugar mill. In case of any effort of sugar mill to exceed export from 10,000 tons, SBP can very good trace this from the record of E form available in its record. In the following paragraphs, we will discuss the types of financing available to exporter. . impertinent DOCUMENTARY BILLS PURCHASED AGAINST L/Cs This type of financing is referred to as Foreign Bills Purchased (FBP). Only those documents are purchased which are passable and which conform to the terms of letters of credit. The documents are forwarded to the L/C opening bank and payment is received through banks foreign correspondents maintaining NOSTRO account in various currencies. Following documents are submitted by the exporter for nego tiation ? Original Letter of Credit (L/C) ? Documents of title to goods (Bill of lading, Airway bill, etc. ? Bill of Exchange (B/E) ? Commercial Invoice ? security department of Origin ? Packing List ? indemnification Policy ? Any other document as per terms of L/C FBP is applicative example of Factoring in which bank purchases the receivable of the client/exporter after making payment and takes the responsibility of accretion of the receivable at its own end. The exporter transfers all rights of ownership of the documents to the bank and authorization to claim reimbursement from the L/C opening bank. This transaction is to be handled with extreme care, vigilance and diligence.All the financial and commercial documents are scrutinized as per terms & conditions of L/C. Documents after careful testing are forwarded to the L/C opening bank and claim of reimbursement is made as well. On realization of the bill, FBP is settled /adjusted. 2. FOREIGN DOCUMENTARY BILLS FOR COLLECTION F inancing against foreign bills is made on export bills which are drawn under Letter of credit and are sent for payment under documentary collection. This is a sale transaction at a price mutually agreed upon between the buyer (bank) and seller (exporter).The documents are sold to the bank and sale proceeds will be impute in the account of seller (exporter). This type of export finance is termed as Finance against Foreign Bills (FAFB). All other procedures of FAFB are similar to FBP except that under FAFB in the event of non-payment of the bill by L/C opening bank or importer, the exporter undertakes to repurchase the same documents at banks marked up price. FAFB is the practical example of Lien on Receivables. 3. FINANCE AGAINST PACKING CREDIT (FAPC)Packing Credit is a sort of pre-shipment or pre-export finance, extended to prime & valued customers (exporters) against valid letter of credit / firm contract order. The finance is provided to the exporter for the following ? Purchase of goods ? Freight charges ? Clearing forwarding charges ? Export duty, etc. ? Packing requirements Finance against packing credit is granted for 180 days or upto the period the shipment of goods is affected whichever is earlier. Lien is marked on the Letter of Credit / Firm bowdlerise in order to prevent negotiation of documents.