How Commercial banks Export Finance to Overseas Importers?
How Commercial banks Export Finance to Overseas Importers?
Generally, commercial banks extend exports credit, often at concessional rates, to finance export transactions to the exporters as a part of their export promotion measures. In addition, credit is also available to overseas buyers so as to facilitate import of goods from India, mainly under two forms.
(a) Buyer’s credit: It is a credit extended by a bank in exporter’s country to an overseas buyer, enabling the buyer to pay for machinery and equipment that she may be importing for a specific project.
(b) Line of credit: It is a credit extended by a bank in exporting country (for example, India) to an overseas bank, institution, or government for the purpose of facilitating the import of a variety of listed goods from the exporting country (India) into the overseas country. A number of importers in the foreign country may be importing the goods under one line of credit.
Commercial banks carry out the task of export financing under the guidelines of the central bank (for example Reserve Bank of India), The export financing regulations are modified from time to time. Most countries have an apex bank coordinating the country’s efforts of financing international trade.
For instance, the Export-Import Bank of India is the principal financial institution coordinating the working of institutions engaged in export import finance in India, whereas the US too has the Export-Import Bank of the US for carrying out similar activities.
(c) Credit Risk Insurance in Export Finance: Easy and hassle-free access to export finance significantly enhances firms’ abilities to compete in international markets. Prior to agreeing to finance a firm’s export transactions, banks need to be assured of the ability of the borrowers to repay the loan. Generally, banks insist on pleading adequate collateral before sanctioning export finance.
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