EXPORT IMPORT PROCEDURES AND DOCUMENTATION

Unit 2

Export Costing & Pricing

Export pricing represents costs that occur in an export transaction . Export

pricing includes the manufacturing cost and any additions or modifications to
products , special quality packaging , ingredients . formula or specification
modification . control , export administration , freight , distribution and
marketing.
Factors that Influence the Setting of an Export Price in International
Marketing

Some of the important factors that influence the setting of an export

price in international marketing are as follows:

The consequences of price changes are more direct and immediate than those
of any other elements of the marketing mix, as they result in subsequent
customer and, in most cases, competitor reactions. Given their power, pricing
issues have attracted surprisingly little research interest compared with other
marketing tools. What applies to a single market-setting holds even more true
for the global marketplace, because additional context factors increases
complexity.

In order to understand the structure of a price, we need first to examine those

basic factors that influence the setting of an export price. These factors include
the following:

1) Costs,

2) Market conditions and customer behaviour (demand or value),

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3) Competition,

4) Legal and political issues,

5) General company policies, including policies on financial matters, production,

organisation structure; and on marketing activities such as the planning and
development of products, the product mix, marketing channels, sales
promotion, advertising, and selling.

These factors are described as follows:

1) Costs:

Costs are often a major factor in price determination and there are a number of
reasons to have detailed information on costs. Costs are useful in setting a price
floor. In the short-run, when a company has excess capacity, the price floor may
be out-of-pocket costs, i.e., such direct costs as la, raw materials, and shipping.
However, in the long-run full costs for all products must be recovered, although
not necessarily full costs for each individual product. The actual cost floor,
therefore, may often be somewhere between direct cost and full cost.

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Costs are also helpful in estimating how rivals will react to setting a specific
price, assuming that knowledge of one’s own cost helps to assess the reactions
of one’s competitors. Costs may help in estimating a price that will keep-out or
discourage new competitors from entering an industry. Internationally, however,
costs are often somewhat less helpful for this purpose than in the domestic
market, since they may vary over a wider range from country to country.

The basic categories of cost incurred to serve domestic and export customers
are the same, e.g., la, raw materials, component parts, selling, shipping,
overheads. But their relative importance as a determinant of price may differ
greatly. For example, the cost of marketing a product in a thin market
thousands of miles from the production plant may be relatively high.

Such items as the cost of salespeople, ocean freight, marine insurance, modified
packaging, specially adapted advertising, and so forth may raise the price floor.
Also, the location of foreign customers affects either the time needed to ship
products or the need for maintaining local inventories, thus influencing either
the cost of transportation – e.g., relatively expensive shipments by air cargo – or
the costs of carrying and financing local inventories. Special legal requirements
may influence production costs; e.g., automobile safety requirements or
legislation affecting food and drugs.

2) Market Conditions (Demand):

The nature of the market determines the upper limit for prices. The utility, or
value, placed on the product by purchasers sets the price ceiling. When a
manager attempts to establish the value of a product in an export market, the
manager in essence is attempting to establish a demand schedule for the
product.
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Values should be measured in terms of product utility, translated into monetary

terms. Thus, pricing can be viewed as a continuous process of adjusting the
price of the export product to the fluctuating utility of the last prospective buyer
so as to make him a customer.

When estimating a demand schedule the market can be stratified, which involve
estimating the number of customers who will buy at several levels of price? The
exporter can then select the strata of interest, which gives the last prospect an
amount of utility equal to the price charged while all other buyers will have
surplus utility in that they would be willing to pay a higher price. Value may be
determined by asking people, by some type of barter experiment, by test market
pricing, by comparison to substitute products, or by statistical analysis of
historical price/volume relationships.

The basic factors that determine how the market will evaluate a product in
foreign markets include demographic factors, customs and traditions, and
economic considerations, all of which are related to customer acceptance and
use of a product.

3) Competition:

While costs and demand conditions circumscribe the price floor and ceiling,
competitive conditions help to determine where within the two extremes the
actual price should be set. Reaction of competitors is often the crucial
consideration imposing practical limitations on export pricing alternatives.
Prices of competitive products (‘substitute’ products) have an impact on the
sales volume attainable by an exporter. The decision is whether to price above,
at the same level as, or below competition.
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Barriers that an exporter can use to provide ‘shelter’ from competition include
having a product distinctiveness, a brand prominence with high brand equity,
and a well-established channel of distribution both between countries and
within a country that can provide greater dealer strength. Obviously, the more
significant the barriers, the more pricing freedom there is.

Under conditions approximating pure competition, price is set in the

marketplace. Price tends to be just enough above costs to keep marginal
producers in business.

Under conditions of monopolistic or imperfect competition, the seller has some

discretion to vary the product quality, promotional efforts, and channel policies
in order to adapt the price of the ‘total product’ to serve pre-selected market
segments. For most branded products and even for some commodities (when
the export marketer and its reputation for service, dependability, and delivery
are known) exporters have some range of discretion over price.

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There are times when an exporter in such a competitive structure ignores

competitive prices.

Under conditions of oligopoly, without sufficient product differentiation to give a

seller a monopoly position, the point between the cost floor and price ceiling at
which products will be priced depends upon the assessment of each oligopolist
of the others’ reactions to his decisions.
4) Legal/Political Influence:

The manager charged with determining prices must consider the legal and
political situations as they exist and as they differ from country to country. Legal
and political factors act primarily to restrict the freedom of a company to set
prices strictly on the basis of economic considerations.

Sometimes foreign officials use pricing guidelines as a criterion for granting

foreign exchange to the buyer of foreign merchandise. In some countries, the
government is concerned with the relationship between the amount paid and
the social benefits of the purchase. Even though the customer may be willing to
pay a high price, the government may refuse to grant adequate foreign
exchange for what it considers to be. Non-essential imports.

5) Company Policies and Marketing Mix:

Export pricing is influenced by past and current corporate philosophy,

organisation, and managerial policies. Ideally, all long-run and short-run
decisions should be recognized as interrelated and interdependent, but as a
practical matter some decisions must be made first and must serve as a basis
for making subsequent decisions. For example, the company’s organisational
structure must be established and maintained for a period of time. During this
period, other activities must be conducted within the constraints of the
structure.

Pricing cannot be divorced from product considerations. Management must

take the customer’s point of view and evaluate a product in terms of its quality
and other characteristics relative to its price. Decisions on the nature of the
product, package, quality, varieties or styles available and so forth influence not
only the cost, but what customers are willing to pay, as well as the degree to
which competitors’ products are considered acceptable substitutes.
5 Important Export Pricing Strategies used in International Marketing

The export pricing strategies used in International Marketing are as

follows:

1) Sliding-Down the Demand Curve:

This resembles the above strategy except that in this case the company reduces
prices faster and further than it would be forced to do in view of potential
competition. A company pursuing this strategy has the objective to become
established in foreign markets as an efficient producer at optimum volume
before foreign or domestic competitors can get entrenched.

This is primarily used by companies introducing product innovations. Here the

strategy involves starting-out with almost the entire emphasis on pricing on the
basis of what the market will bear and moving from this point toward cost
pricing at a measured pace.
The pace must be slow enough to pick-up profits but fast enough to discourage
competitors from entering the market. Companies following this strategy are
seeking to recover development costs as they become an established entity in
the market.

2) Skimming the Market:

A simple, and somewhat unusual, objective might be to make the largest short
run profit possible and retire from the business. This involves the strategy of
getting the highest possible price out of a product’s distinctiveness in the short-
run without worrying about the long-run company position in the foreign
market. A high price is set until the small market at that price is exhausted.

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The price may then be lowered to tap a second successive market or income
level. However, little thought is given to the company’s permanent position in
the field. This strategy may be used either because the company feels that there
is no permanent future for the product in a foreign market or markets or that its
costs are high and a competitor may come in and take the market away.

3) Penetration Pricing:

This strategy involves establishing a price sufficiently low to rapidly create a

mass market. Emphasis is placed on value rather than cost in setting the price.
Penetration pricing involves the assumption that if the price is set to bring in a
mass market, the effect of this volume will be to lower costs sufficiently to make
the price yield a profit.
In an industry of rapidly decreasing costs, penetration pricing can accelerate
the process. The strategy also involves the assumption that demand is highly
elastic or that foreign purchasers buy primarily on a price basis. This strategy
may be more appropriate than skimming for multinational companies facing the
demand conditions of the less developed countries.

An extreme form of penetration pricing is expansionistic pricing. This is the

same as penetration pricing except that it goes much lower in order to get a
larger percentage of the customers who are potential buyers at very low prices.
This strategy assumes:

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i) A high degree of price elasticity of demand, and

ii) Costs extremely susceptible to reduction with volume output.

This may be based on experience-curve pricing.

4) Preemptive Pricing:

Setting prices so low as to discourage competition is the objective of preemptive

pricing. The price will be close to total unit costs for this reason. As lower costs
result from increased volume, still lower prices will be quoted to buyers. If
necessary to discourage potential competition prices may even be set
temporarily below total cost. The assumption is that profits will be made in the
long run through market dominance. This approach, too, may utilize experience
curves.
5) Extinction Pricing:

The purpose of extinction pricing is to eliminate existing competitors from

international markets. It may be adopted by large, low-cost producers as a
conscious means of driving weaker, marginal producers out of the industry.
Since it may prove highly demoralizing, especially for small firms and those in
newly developing countries, it can slow down economic advancement and thus
retard the development of otherwise potentially substantial markets.

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Preemptive and extinction pricing strategies are both closely associated with
‘dumping’ in international markets. Actually, they are merely variations of the
dumping process, depending upon the domestic or ‘home’ market price.
Although they may serve to capture initially a foreign market and may keep-out,
or drive-out, competitors, they should be used only with extreme caution.

There is the ever present danger that Foreign Governments will impose
arbitrary restrictions on the import and sales of the product, consequently
closing the market completely to the producer. More importantly, once
customers have become used to buying at low prices it may prove difficult, if
not impossible, to raise them subsequently to profitable levels.

Export Documentation

The trade between two nations involves significant documentation process.

In domestic trade, an organization has to fulfill only the requirements of

taxation department of the own country and make a simple invoice against the
customers.
However, in case of international trade, exporters and importers have to submit
a number of documents to different institutions.

These institutions are as follows:

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a. Importing organization that has placed order and exporting organization that
is selling the goods

b. Taxation, custom control, and exchange control authorities of both the

countries

c. Port authorities for loading and unloading of goods

d. Shipping and warehousing authorities for transporting and storing goods

e. Inspection agencies that inspect and verify the products

f. Banks of exporting and importing countries if involved

Export documentation plays a vital role in the flow and movement of goods and
services in international markets. This documentation involves heavy and
cumbersome paper work for exporting organizations.

There are various outsourcing agencies/ experts that prepare these documents
on behalf of organizations and charge fee for it. Exporters have to understand
the importance of each and every document. If they miss any document, the
contract may be cancelled.

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Export Import Procedure

Export Import procedure is referred as the correct and prescribed sequential

steps followings that complete a shipment Logistics.

Export Import Documentation

Documentation is that regulatory and commercial formalities fulfillment that is

needed for an international transit of a shipment. Approximately 60 percent of
the documents are prescribed by the jurisdiction of country of origin or country
of import, while remaining percentage comes from facilitation among buyer,
seller, and intermediaries.

The export process is made more complex by the wide variety of documents that
the exporter needs to complete to ensure that the order reaches its destination
quickly, safely and without problems. These documents range comprise those
required by the South African authorities (such as bills of entry, foreign
exchange documents, export permits, etc.), those required by the importer
(such as the Pro forma and Commercial invoices, certificates of origin and
Reserve Bank forms, the letter of credit and the bill of lading) and finally, those
required for transportation (such as the bill of lading, the airway bill or the
freight transit order). Documentation requirements for export consignments
also vary widely according to the country of destination and the type of product
being shipped. Most exporters rely on an international freight forwarder to
handle the export documentation because of the multitude of documentary
requirements involved in physically exporting goods and it is strongly
recommended that you also make use of a freight forwarder to help you work
your way through the maze of documentation.

Import

An import is a good brought into a jurisdiction, especially across a country's

border, from an external source. The party bringing in the good is called an
importer. An import in the receiving country is an export from the sending
country. Importation and exportation are the defining financial transactions of
international trade.

"Imports" consist of transactions in goods and services to a resident of a

jurisdiction (such as a nation) from non-residents. The exact definition of
imports in national accounts includes and excludes specific "borderline" cases.

Export

The term export means shipping in the goods and services out of the jurisdiction
of a nation. The exporter of such goods and services is referred to as an
"exporter" and is based in the country of sales whereas the overseas based
buyer is referred to as an "importer". In international trade, "exports" refers to
selling goods and services produced in the home country to other markets.

Role & Significance of Export Documentation

Export documentation plays an important role in international marketing as it

facilitates the smooth transit of goods and payments thereof across national
frontiers.

● Exporters are required to follow certain formalities and procedures, using

a number of documents.
● Each of these documents serves a specific purpose and hence carries its
own significance.
● A clear understanding of all documents and their purpose, how to
prepare these, number of copies required, when and where to file, is a
must for all export professionals.
● An attestation of facts, such as a certificate of origin
● Evidence of the terms and conditions of a contract if carriage, such as in
the case of an airway bill
● Evidence of possession or title to goods, such as in the case of a bill of
lading
● A promissory note; that is, a promise to pay
● A demand for payment, as with a bill of exchange
 ● A declaration of liability, such as with a customs bill of entry
● A receipt for goods received.

Export Documentation

● Export Documentation in India has evolved a great deal of interest since

1990.
● Prior to 1990, documentation was manual and it lacked proper co-
ordination.
● The result was a lot of delays and mistakes, rendering the task very
clumsy, tiresome, repetitive, and truly frustrating.
● India adopted the ADS (Aligned Documentation System) in 1991 which is
the internationally accepted documentation system.

Parties Interested in Export Documentation in India

Parties interested in the documentation of exports in India are:

● Buyers and exporters.

● Buying agents.
● RBI.
● Authorized dealers (where the exporter has his bank account).
● Buyer’s bank (foreign bank).
● DGFT.
● Customs and Port Authorities.
● VAT and Excise Authorities.
● EPC's.
● Insurance Companies.
● Inspection Agencies.
● Clearing and Forwarding Agents.
● Shipping Companies/Airlines and Inland Carriers etc.

Classification of Export Documents

Export Documents can be classified mainly into following two categories:

1. Regulatory Documents.
2. Auxiliary Documents.

1. Regulatory Documents
● Commercial Invoice
● Packaging List
● Certificate of Inspection/Quality Control (if applicable)
● Bill of Lading
● Airway Bill
● Shipping Advise
● Insurance Certificate
● Bill of Exchange
● Certificate of Origin

Commercial Invoice
A commercial invoice is a document used in foreign trade. It is used as a
customs declaration provided by the person or corporation that is exporting an
item across international borders. Although there is no model format, the
document must include a few specific pieces of information such as the parties
involved in the shipping transaction, the goods being transported, the country
of manufacture, and the Harmonized System codes for those goods. A
commercial invoice must also include a statement certifying that the invoice is
true, and a signature.

A commercial invoice is used to calculate tariffs, international commercial terms

(like the Cost in a CIF) and is commonly used for customs purposes.

Commercial invoices are in European countries not usually for payment. The
definitive invoice for payment typically has only the words "invoice". This
invoice can also be used as a commercial invoice if additional information is
disclosed.

Packaging List

A packing list specifies the goods in individual packages and it usually gives the
gross and net weights and dimensions of each package. A packing list is very
informative for the importer as he can see from it the exact nature and
specification of the goods as packed. It also caters customs authorities if they
wish to open a certain package with certain goods for examination/inspection. If
a theft is alleged due to the fact that a package is opened or repackaged, it is
easy to find out if something is missing with a well prepared packing list. A
packing list can be issued as a separate document or it can be added to the
invoice. In any case, customs authorities do not require a packing list as an
obligatory document in order to dispatch the goods.

Certificate of Inspection/Quality Control (if applicable)

Inspection of pre controlled Quality is another important part of the Export

Import Documentation (If applicable), in International business the quality and
its related certificates are needed as evidence that the promised quality
parameters are been met.

Inspection Certificate is the standard document issued by the Inspection Agency

as agreed (Third party Inspection or Buyer's representative Inspection), after
the expert and systematic examination of goods/services with a comparative
study of deviation in the quality of the shipment for exports.

Quality Certificate comes from Quality Control Authorities and most of the times
they are International and have a system of issuance of such certificate after the
Registration Cum Membership formalities. This is standard in language and is
issued by the Quality Certification Authority of different durations (most of them
are not applicable for Life Time).

Bill of Lading
Bill of Lading is a mandatory document that serves the purpose of evidence that
goods are been dispatched by the carrier and this document is issued by the
Shipping Company as a proof that the shipment has been received after
customs clearance in the country of Origin. This is transport document that acts
as a prime document in Sea Transportation. The Air Way Bill is the replica of
Transport Document in case of Air Transportation. Bill of lading is one of three
important documents used in international tradeto help guarantee that
exporters receive payment and importers receive goods/merchandise. A straight
bill of lading is used when payment has been made in advance of shipment and
requires a carrier to deliver the merchandise to the appropriate party. An order
bill of lading is used when shipping commodities/merchandise prior to payment,
requiring a carrier to deliver the merchandise to the importer, and at the
endorsement of the exporter the carrier may transfer title to the buyer/importer.
Endorsed order bills of lading can be traded as a security or serve as collateral
against debt obligations.

Air Way Bill

Bill is the document which is issued by the Air Lines or its representative, if it a
master air way bill then it should be issued by the Airlines. It is a document that
is used in air transportation and acts as a proof that the shipment has been
dispatched along with the carrier details. This also consists of terms and
conditions of transit framed and promised by the transporter. The bill consist
the shipper's name and address, consignee's name and address, three letter
origin airport code, three letter destination airport code, declared shipment
value for customs, number of pieces, gross weight, a description of the goods
and any special instructions. It also contains the conditions of contract that
describe the carrier's terms and conditions, such as its liability limits and claims
procedures.

Air waybills have eleven digit numbers which can be used to make bookings,
check the status of delivery, and current position of the shipment. The number
consists of:

1. The first three numbers are the airline/carrier prefix. Each airline has been
assigned a 3- digit number by IATA, so from the prefix we know which airline
has issued the document.

2. The next seven digits are the running number/s - one number for each
consignment

3. The last digit is what is called the check digit. It is arrived at in the following
manner:

The seven digits running numbers are separated by 7, by using a long partition
calculation. The remainder becomes the check digit. That is why no AWB
number ends with a figure greater than 6. Air waybills are issued in 8 sets of
different colours. The first three copies are categorized as originals. The first
original, Green in colour, is the Issuing Carrier's copy. The second, coloured
Pink, is the Consignee's Copy. The third is Blue coloured and is the Shipper's
copy. A fourth Brown copy acts as the Delivery Receipt, or proof of delivery. The
other three copies are white.

A freight forwarder offering a consolidation service will issue its own air waybill
or bill of lading. From now on AWB will be used to refer to both. This is called a
Forwarder's or House AWB with its equivalent House BL. These act as contracts
of carriage between the shipper and the forwarder, who in this case becomes a
Deemed Carrier. The forwarder in turn enters into contracts with one or more
carriers, often using more than one mode of transportation. The contract of
carriage between the forwarder and carrier is called a Master Air Way Bill
(MAWB or MBL). A House Air Waybill (HAWB) or Bill of Lading (HBL) could act
as a multimodal transport document. Shipping Advice

A Shipping/Shipment advice is a commercial document, this is issued by the

exporter/seller, who is the beneficiary of the letter of credit, in order to give
shipment details to the importer, who is the applicant of the letter of credit. The
main function of the shipment advice is to allow importers to arrange transport
insurance in a timely manner. Especially this document is vital importer in
which situations importers have to organize the transport insurance, such as
FCA, FOB, CFR, FAS, CPT and EXW deliveries.

Insurance Certificate

Insurance Certificate is a document that is issued by the Insurer; it acts as a

proof that within the agreed and mentioned terms and conditions the shipment
has been covered from the risk and perils responsible for loss and damage.
Insurance certificate is issued after the payment of premium payable for an
Insurance Policy taken by an Exporter/Importer. It is a proof that the loss and
damage and its claim is incidental to the policy which drafts this certificate.

Bill of Exchange

A bill of exchange is a binding agreement by one party to pay a fixed amount of

cash to another party as of a programmed date or on demand. Bills of exchange
are primarily used in international business. Their use has declined as other
forms of payment have become more popular.

A written, unconditional order by one party (the drawer) to another (the

Drawee) to pay a fixed/certain sum, either immediately (a sight bill) or on a
fixed date (a term bill), for payment of goods and/or services received. The
drawee accepts the bill by signing it, thus converting it into a post-dated check
and a binding contract. Issuers of bills of exchange use their own formats, so
there is some variation from the information just noted, as well as in the layout
of the document. A bill of exchange is transferable, so the drawee may find itself
paying an entirely different party than it initially agreed to pay. The payee can
transfer the bill to another party by endorsing the back of the document. A
payee may sell a bill of exchange to another party for a discounted price in
order to obtain funds prior to the payment date specified on the bill. The
discount represents the interest cost associated with being paid early. A bill of
exchange does not usually include a prerequisite to pay interest. If interest is to
be paid, then the percentage interest rate is stated on the document. If a bill
does not pay interest, then it is effectively a post-dated check. If bill of exchange
is accepted, its risk is that the drawee may not pay. This is a particular concern
if the drawee is a person or non-bank business. No matter whom the drawee is,
the payee should explore the creditworthiness of the issuer before accepting the
bill. If the drawee refuses to pay on the due date of the bill, then the bill is said
to be dishonoured.

Certificate of Origin

Certificate of Origin is a document that proves the place of manufacturing of

shipment. This is issued by the Chamber of Commerce or the competent
authority that has been stated by the buyer in Export Order/Contract, at times
the Import prefer the endorsement of the respective country's consulate as
attestation for certificate of origin, Certificate of Origin is the documentary
evidence that states the location and boundaries of origin of the shipment for
transmission.

2) Auxiliary Documents

● Proforma Invoice
● Shipping Instructions
● Insurance Declaration
● Intimation for Inspection
● Shipping Order
● Mates Receipt
● Application for Certificate of Origin
● Letter to bank for negotiation/collection of documents

Pro forma Invoice

There are three main types of invoices that are used in international trade. The
first is the commercial invoice. This is a document issued by one organization
and addressed to another, detailing out the goods and/or services provided, the
quantities, costs and any other relevant information required under the laws of
the countries concerned. For example, in the United Kingdom, if VAT (value
added tax) is included, the VAT number of the organization issuing the invoice
must be detailed in full on the invoice.

The commercial invoice is in addition issued in accordance with local

accounting laws and is the major instrument by which a company details their
sales and purchases in their Accounts. A commercial invoice can also be issued
to accompany goods in transit and is the document used by Customs in all
countries to verify values and assist in the accurate application of tax collection,
such as Duty and Excise.
There are some circumstances, however, when a shipment is sent free of
charge. This can include warranty shipments, samples, or any shipment where
the official/formal declaration of value is not included in the accounting
practices. However, since all goods must have a value, an invoice is required for
all international shipments. In the circumstances/situation detailed above, a
Customs invoice may be issued. This is an invoice which can still be used by
Customs in all countries to verify values, but is not included in the exporting
organizations' account procedures. Unless the importing country law require
this to be the case.

With contracts where the payment is required before the goods and/or services
are sent, then a pro-forma invoice is issued. A pro-forma invoice gives all the
details that would be found on a commercial invoice, but it is not part of the
accounting procedure. It is a demand for payment for a contract/deal which
may, or may not, be accepted. Once the funds have been paid, then a
commercial invoice needs to be issued to complete the accounting trail.

Details/Data needed for Performa Invoice Preparation

Title

1. Name & Address.

2. Details of Goods or Services.

3. Unit Price, Quantity, and Total Price.

4. FOB Values.

5. Additional Freight Charges.

6. INCO Terms as part of the total price statement. 7. Origin (country) of

goods/services.

8. Country of supply.

9. Payment terms. 10. Insurance.

11. Despatch.

12. Packing.

13. Validity.
There are additional items that can be added. Each industry and marketplace
will have their own specific requirements. Please do memorize that nothing
stays the same and that changes in worldwide trade practices will always
happen. So the template of an organisation's pro-forma invoice will need to be
reviewed on a regular basis.

Shipping Instructions

A Shipping Instruction (S/I) is a document advising details of cargo and

exporter's requirements of its physical movement. It provides basic information
to draw up the Bill of Lading. The Shipping Instruction application facilitates
you to create a Normal as well as a Shipping instructions includes following
information:

Shippers/Exporter, Consignee, Notify party, Booking Number, Place Of receipt,

Vessel, Port of Loading, Port of Discharge, Place of Delivery, Container
Numbers, No of Packages, Description of Packages & Goods, Gross Weight,
Measurements, Terms Of Payment,Documentation Types.

Intimation for Inspection

A report issued by an independent surveyor (Inspection Company) or the

exporter on the specifications of the shipment, including quality, quantity,
and/or price, etc; required by certain buyer and countries. Inspection is usually
performed by the third party, often an independent testing organization.

During the process of export as soon as the goods are manufactured or

procured and got the clearance from the excise authorities the next stage
comes is THE INSPECTION, the other authority which is approached at this
stage is Export Inspection Agency for conducting quality control and pre-
shipment inspection. An inspector is deputed by the goods to conform to the
prescribed specification, an inspection certificate is issued.

Shipping Advice

Definition: Correspondence sent by a seller to a foreign buyer as intimation

that the shipment of the ordered goods is on its way. A copy of the invoice and
the packing slip (and sometimes a copy of bill of lading) may also be attached. It
is also known as advice note. Once after shipping goods from your (seller's)
place, you need to transmit shipping details with entire details of carriers and
expected time of arrival at your buyer's place. Shipping advice helps to track
the goods as per details and importer can plan import clearance procedures
accordingly. If buyer not received documents on time, from their bank for taking
delivery of goods he can keep an alert to get the documents and make sure, all
documents are in order to customs clear the goods and take delivery.
Contents of Shipping Advice

1. The purchase order or Letter of Credit number, or any other reference

number of contract of the said shipment if necessary.

2. Exporter's commercial invoice number and date.

3. Bill of Lading/airway bill number and date

4. Shipping carrier's name with liner name for example in case of sea
shipments, MAERSK LINE, EVERGREEN, MSC, HYUNDAI etc. For air carriers,
DHL, FEDEX, AIR INDIA etc.

5. If any freight forwarders involved, their complete contact details at

destination with telephone, emails and key contact person's name.

6. Name of vessel loaded at port of loading

7. Expected time of arrival at final destination.

8. If goods are trans-shipped, the details of transhipment port and the details of
vessel /aircraft with ETA at destination. Updating transhipment sailing details
once, vessel sailed from transhipment port or flight details.

Mate Receipt

Mate Receipt is a document which is issued by the caption of the ship,

acknowledgement to the shipper for receiving shipment in accordance with the
description the Ship (or any authority appointed by the Caption of the Ship) in
absence of Caption of the mention in the Mate Receipt, Mate Receipt can be
issued by the Assistant of the Caption of Ship. In any case Shipping Company is
not supposed to issue Mate Receipt. Shipper holds Mate Receipt as a proof of
the loading of shipment in a vessel.

Application of Certificate of Origin

Exporter is supposed to write an application to the issuing authority (Chamber

of Commerce) in context with a given shipment for the issuance of Certificate of
Origin. Application of Certificate of Origin is written in request letter format on
the letter head of an Exporter that should bear a valid authorised signatory. This
application is accompanied with the charge/fee applicable and supporting
documents in regards with the shipment for which Certificate of Origin is
needed.

Letter to Bank for Negotiation/Collection of Export Proceed

Exporter once the shipment sails out or when exporter is with the Bill of
Lading/Air Way Bill may start negotiating with the opening bank (in case of L/C)
and in even in case of D/A or D/P an exporter once the export procedure is
successful and generates the required documents may start the remittance of
the sale, for the negotiation of payment Exporter writes an application to the
beneficiary bank for beginning the remittance action. This Letter is in the form
of a request to the beneficiary bank that initiates the remittance process, this is
written and signed by the Exporter with the supporting documents and is
submitted at the beneficiary bank.

Methods/Terms of payments for Exports

Subject Matter:

Payments in international trade are generally made through bills of exchange

and banker’s drafts.

A bill of exchange is an order drawn by a person upon a bank or another person

asking the latter to make certain payments to a third party.

For example:

Suppose, that an Indian Jute merchant Shanker has exported Jute of the value
of Rs. 1,00,000 to an English merchant Arther. Also another Indian merchant
Sinha has imported textiles of the value of Rs. 1,00,000 from Philip an English
merchant. If the transactions are settled by Arther by sending gold to Shanker
and by Sinha sending gold to Phillip that would mean double expenditure in the
cost of carriage. But suppose that the Indian exporter draws a bill on the
English importer and sells it to the Indian importer.

ADVERTISEMENTS:

The Indian importer in his turn, buys the bill and sends it to the English
exporter who presents it to the English importer and receives payments from
him. Thus, without any movement of money the two debts are settled by one
bill. This is the way by which bills are used to finance foreign trade.

In recent times the use of bills is decreasing and settlements are now made by
means of banker’s drafts or cable transfers (in the case of urgent payments).
The importer goes to a bank, buys a draft and sends it to the exporter. The
latter presents it for payment to foreign branch or agent to the bank.

Bills may be “Sight” or “Long” bills. A sight bill is a bill payable at sight i.e.,
on presentation. A Long bill is payable after a certain period mostly 90 days
after presentation.

If the importer or an accepting house on his behalf writes the word “accepted”
on the face of the bill and signs his name the bill is said to be “accepted”. The
acceptor then becomes liable for paying the bill. If the bill is sold in the money
market it is said to be “discounted”. The seller receives the face value of the bill
Less the interest at an agreed rate for the currency of the bill.

ADVERTISEMENTS:

In addition to the three modes of foreign payments written above i.e:

(a) Bill of exchange,

(b) Banker’s draft, and

(c) Cable or telegraphic transfer; there are five other modes of payments in
international trade, they are: (i) Payment in advance, (ii) Open account, (iii)
Documentary bills, (iv) Documentary credit under letters of credit, (v) Shipment
on consignment basis.

1. Advance Payment:

ADVERTISEMENTS:

When the exporter receives the bank draft or bank advice before the
contractual obligation of shipment is fulfilled. The payment may be received
either as soon as the order is confirmed or any time before shipment. This
method is most advantageous from exporter point of view. The exporter may be
willing to impose the term as a pre-condition only when he knows that the
goods are in heavy demand and the goods are of rare-nature.

2. Open Account:

Under this method the exporter sends the invoice and other documents relating
to transfer of title and possession of goods direct to the buyer (importer) and on
receipt of such documents the importer remits the amount involved
immediately. In case a credit period is allowed the importer will make the
payment at the expiry of the credit period. This method is very simple and
avoids many complications and additional charges. The entire risk in this case is
of exporter. In India, the Reserve Bank of India has permitted the facility for
inter-company transactions against “Round Sum Remittances.”

3. Documentary Bills:

The above mentioned two forms of payment—advance payment and payment on

open account are not very common in foreign trade. The documentary bills is a
very common method adopted for payment in international trade.

These bills act as a bridge between:

(i) The unwillingness of the exporter to part with the goods until he is paid for,
and

(ii) The unwillingness of the importer to pay for the import unless he is sure of
receiving the goods.

Banks act as a via-media by giving the necessary assurance to both the parties.
Under this form of payment, the exporter submits the documents to his bank
along with the bill of exchange. The exporter’s bank then sends the bill along
with the documents to its correspondent bank in the importer’s country and
presents the bill before the importer either for payment or for acceptance as
per terms of the bill. The documents along with bill are full set of bill of lading
invoice and a marine insurance policy.
There are two types of documents under this method:

(i) Documents against Payments (D/P), and

ADVERTISEMENTS:

(ii) Documents against Acceptance (D/A).

(i) Documents Against Payment (D/P):

In such cases goods are shipped and the documents of title of goods along with
the bill of exchange are surrounded to his bank by the exporter. The bank will
send the documents and bill to its correspondent bank in the importer’s country.

The bank in the importing country will present the documents along-with the
bill to the buyer and on making the payments of the bill of exchange will hand
over the documents to the importer. Until the payments are made the title to the
goods vests with the exporter.

ADVERTISEMENTS:

(ii) Documents against Acceptance (D/A):

In this case the documents are sent to the importer through banker, the banker
presents the bill to the importer for acceptance and if he accepts the bill, the
bank will deliver the documents of title to the buyer (importer) so that he may
take possession of goods. On due date, the bank will again present the bill to
the buyer for payment and if payment is received, the collecting banker sends
the amount to the exporter through normal banking channels to be credited to
his account.

Normally, under D/A bills the exporter will have to wait for payment till the final
payment is received on due date. This may take time and the commercial banks
very often discount such acceptances and thus the exporter receives the
payment of the bill immediately after shipment of goods. Both the types of bill-
D/A and D/P are common in export trade, there are various commercial risks
which the exporter must take into account before he agrees to accept payment
on such basis.

4. Documentary Credit under Letter of Credit:

Documentary Credit Definition

"Documentary Credit may be defined as the various forms of guaranty by a bank

for a specific transaction, which implies the credit worthiness of an importer,
applicable in International Business, that ensures that the importer is promising
the to take the title to the goods and is adding clause to the deal that payment
will be made upon the successful shipment of consignment."

Documentary Credit is a means of making and receiving payment in

International Business in which payment can be received by the exporter upon
fulfilment of documentary evidences proving that the goods are dispatched. This
is a mechanism of International payments where bank initiates the official and
legal procedure to flow the payments towards exporter (not when goods arrive
or received by importer). Documentary Credit is a more secure mode of
receiving payment by an exporter, however it throws more risk to the importer
and is also more expensive as compared with other applicable modes of
payment with which payment can be made or received. This suits to exporters
who are new with the buyer to whom goods will be dispatched; it is also
preferred by the exporters who produces

Letter of Credit (L/C)

Documentary Credit’s version which is popular enough in International

Business is known as Letter of Credit. Letter of Credit is the pre-programmed
arrangement of payment made by the importer to pay against the goods
dispatched by the exporter, it follows the legal frame work of Documentary
Credit, Letter of Credit works on instructions provided by the importer at the
time of opening a Letter of Credit, Letter of Credit is opened by importer’s bank
(known as opening bank) as per the guidelines provided by the importer, which
are later on taking shape of terms and conditions of Letter of Credit. Under
routine type of Letter of Credit payments there are two banks involved:
 1. Opening Bank: Opening Bank is a bank which receives documentary will
of an importer to create an opportunity for an exporter to receive
payment upon fulfillment of terms and conditions mentioned advice of the
Letter of Credit. This bank initiates the flow of funds from the account of
the importer towards the Beneficiary Bank.
2. Beneficiary Bank: Beneficiary Bank is the bank of exporter which is
made as a party of payment in International exchange, happening at the
time of payment under Documentary Credit through Letter of Credit, in
country of export, beneficiary bank is the bank which receives the
payment and further transfer the amount in the account of exporter,
Beneficiary bank is also responsible for the negotiation of payment which
initiates the flow of funds from the opening bank till exporter’s bank
account, beneficiary bank forward the documents related with the
shipment as evidence of dispatch of consignment, which act as eligibility
of receiving the payment.

Types of Letter of Credit

Letter of Credit further consist of many variants as per the requirement of

buyer and seller, buyer and seller may further want to maximise or minimise the
risk associated with payment in a different proportion and hence there should
exist customised Letter of Credit, following are the different types of Letter of
Credit:-

1. Revocable Letter of Credit: Under this arrangement of payment made

by the importer, a buyer can revoke the promise to make payment until
payment is made, this is less favorable for exporter and involves higher
degree of risk in receiving payment by the exporter, and there exist no
protection as support to the payment receivable by an exporter.
2. Irrevocable Letter of Credit: Within this arrangement of payment made
by a buyer an importer leaves a privilege to refuse or revoke the payment
upon the fulfillment of documented terms and conditions mentioned at
the time of opening of Letter of Credit, hence opening bank under this
system cannot stop the payment of an exporter if exporter has eligibility
to receive the payment. This version of L/C is more secure for the
 exporters and provides lesser degree of risk associated with the payment
receivable.
3. Confirmed Letter of Credit: This is high definition version of
Irrevocable L/C in which a second guarantee is added other the
obligation of opening bank to pay upon fulfillment of terms and
conditions, there exists third bank in overall negotiation of L/C which
further adds strength to credit worthiness of opening bank and furthers
enhances chances of payment over and above the opening banks liability
to pay. This is least risky for seller but is further expensive than other
versions of L/Cs.
4. Revolving Letter of Credit: This is applicable in such situations when a
seller is responsible for shipment of multiple consignment within a
stipulated longer time frame, when lot wise production is carried out for
a bulk quantity as consignment and seller needs payment immediately
after the dispatch of one portion of whole consignment then this type of
Letter of Credit is the best method of payment and is highly favorable for
seller but is more expensive for buyer, in other words revolving L/C is
joint form of multiple L/Cs which could have been availed by a seller.

5. Shipment on Consignment Basis:

ADVERTISEMENTS:

Under this method the exporter makes shipment of goods to overseas

consignee/agent without making any claim for payment for the goods shipped
but retains the title of the goods with him as also the risk attached three to even
though the possession of goods with the overseas importer. The payment under
such contracts will be made only when goods are sold under contracts the risk
is of great amount. Thus, the best form of international payment is the
documentary credit against Letter of Credit and D/P or D/A come to next. All
other methods are rarely adopted under terms of contract and under special
circumstances.

Rate of Exchange:
Rate of exchange is that rate at which a unit of one country exchanges for the
currency of another is the rate of exchange between them.

Par Exchange:

When the imports and exports of a country are equal the demand for foreign
currency and its supply or conversely, the supply of home currency and the
demand for it will be equal. The exchange will be at par. If the supply of foreign
currency is greater than the demand it will fall below par and the home
currency will appreciate.

Exchange Rate Determination:

ADVERTISEMENTS:

Now, we are going to examine how the rate of exchange in determined

under different monetary systems:

(i) Under Gold Standard:

When two trading countries both having gold standard, their currencies can be
converted into gold at a fixed rate. The exchange rate between the two
countries will not depart or fluctuate much from the Mint Par and will move
between the two points of export and import of gold. These points are called
“Gold Points” or “Specie Points”. This point is established by adding or
subtracting the cost of transporting gold from the Mint Par.

(ii) Where one Country is on Gold Standard and the Other One is on
Silver Standard:

Suppose there are two countries say Britain and India. Britain is having a gold
standard and India the Silver Standard. How the rate of these two countries will
be determined? The rate in India will depend on the price of gold in terms of
silver. In the same way, in London, the rate of exchange will depend on the price
of silver in terms of gold. This system also does not prevail anywhere.
Export Finance: Meaning and Export Credit in India

Article shared by :

ADVERTISEMENTS:

This article provides an overview on the concept of ‘Export Finance’.

After reading this article you will learn about: 1. Meaning of Export
Finance 2. Export Credit in India 3. Export Finance to Overseas
Importers 4. Credit Risk Insurance in Export Finance 5. WTO
Compatibility of Trade Finance and Insurance Schemes.

Meaning of Export Finance:

In order to be competitive in markets, exporters are often expected to offer

attractive credit terms to their overseas buyers. Extending such credits to
foreign buyers put considerable strain on the liquidity of the exporting firms.
Therefore, it is extremely important to make adequate trade finances available
to the exporters from external sources at competitive terms during the post-
shipment stage.

Unless competitive trade finance is available to the exporters, they often resort
to quote lower prices to compensate their inability to offer competitive credit
terms. As a part of export promotion strategy, national governments around the
world offer export credit, often at concessional rates to facilitate exports.
Financing

In simple words 'Financing' means offering and involvement of funds legally in a

business project/phase for fulfilment of course of business activities which
would have been left incomplete in absence of funds needed for the trade and
commercial activities. Financing is association of two legal entities which
involves exchange of funds for a specific business purpose, along with an
intention to receive back funds greater than what has been invested/employed
(this remains the purpose with financer), and intention of beneficiary remains
within the achievement, that the employment of funds received by the financier
will generate either an additional revenue (after employment of funds) or
routine revenue which is needed by an organisation to stay live and profitable.
At the same time this should be noted that every time Financing is not only
required for the additional trade & commercial activities, but some time
financing is also taken as the blend in which risk is divided between financer
and beneficiary in normal course of business execution.

Financing in International business becomes more important when the

economies are in process of integration and when there exist global or regional
boom, sometimes boom in the entire world from trade and commerce
perspective is difficult, however this is an advantage of International Business
that if there is expansion less than acceptable limit, the trader can target the
different region of the world's market. In almost every situation there is a need
of financing. since Balance of payment goes towards surplus by increase in
exports, therefore export financing becomes more important, however at the
same time, since none of the country is fit enough in terms of balanced 'Factors
of Production' therefore in order to expand the horizon for exports, countries
will have to rely on imports, import of raw material, import of packing
technology & material, imports of production technology etc. are few situations
which are seeking room for import financing.
In India the export expansion and export promotion has been the challenging
areas of the Foreign Trade. For Export Financing following three bodies are
available in India:

1. EXIM Bank (Export-Import Bank): Looking at the different specific need

of export financing and export promotion, the Government of India has
established Export- Import Bank as a specialised Institution for meeting out the
Financing need of Export & Import items

2. Commercial Bank: As the branches of Export Import bank are not available
at each and every corner of the country therefore to overcome this draw back
Commercial Banks plays a major role in meeting out financing for
manufacturing of Export products. These commercial banks being large in
number and situated throughout the country therefore a huge amount of
financing is done by them with respect to export

3. ECGC of India (Export Credit Guarantee Corporation of India): The

biggest risk in financing is bad debts which mean total loss or unrecovered
financed amount. The Commercial bank having largest banking network in the
country are able to provide maximum financing for meeting out working
requirement of agriculture, industrial and international trade. Therefore ECGC
through commercial banks is able to finance to meet out the financial
requirement of Export-Import Business. Through Refinancing activity, ECGC is
able to provide financing support to commercial banks so that they are able to
lend Exporter & Importers without any hassle.

Since International Trade consist of distinction as Exports and Imports,

therefore the financing has been classified in following two categories:

1. Export Financing

2. Import Financing
Export Financing

Export Financing is that act, where the offer for employment of funds is made
by a financer for such trade and commercial activities ending with export
proceed.

Institutions for Availing Export Financing

Points/Sources of Export Financing depends on industry type, product type and

location of the enterprise etc. however approximately the uniform pattern of
granting financing and assisting the exporters is taken in practice so that the
uniform growth and streamed development of Export sector can be achieved.
Few important sources of Export Financing in India are listed below:

> Commercial Banks

In India commercial scheduled banks are more willing and are guided to offer
the financing for the Export sector of India regardless of region (Exceptions are
SEZ, FTZ etc.), they although are guided by the EXIM Bank and other financial
subsidiaries of Ministry of Commerce and NITI Ayog (erstwhile Planning
Commission). Private sector commercial banks are also falling in the same set
and are participating in Export Financing as per the guidelines of the governing
authorities. Especially the bank with which Exporter is maintaining current
bank account and if the same bank is the negotiating bank then commercial
bank is more keen to offer different crafted Export Financing schemes and
attractive interest rate so as to promote the habit of availing finances.

Non-Banking Institution and other Promotional Institutions

In various countries there are dedicated investment or/and development banks

which will have precise products customised to promote investments and
definite export orders of your trade. When an exporter is seeking extraordinary
financing for exports, the banks will require that from exporter to produce a
business plan explaining your marketing with reference to export in
International Market, the bank may also need guarantee or some form of
security for the amount an exporter is getting financed. An Exporter need to
communicate with bank authorities or his export promotion agency to find out
what export financing options are available in his country. Developments along
with the joint operations with the Export Promotion Agencies are actually
exercising the Export Promotional activities by the means of Export Financing.
Besides the routine institutions some other promotional parallel with the
commercial banks run the Export Financing in India.

Categories of Export Financing

The entire time frame of the one export cycle is quite lengthy and consist of
various stages, those different stages seeks various options and needs for the
funds to carry out the operations for export, the below stated 'classification of
Export Financing' is based on the obligations of buyer and seller. In order to
easily understand the types of financing, the first category keeps the time in
which sellers' responsibilities are present and the second category is from and
up to where buyers' responsibility operational.

1. Pre-Shipment Finance

2. Post-Shipment Finance

Pre-Shipment Finance

Pre-shipment finance encompasses the finance options which are available from
the financing/funding agency and availed by the exporter before the
consignment went out the boundaries of the Exporting country, however since
the operational arena of an exporter remains till his shipment gets clearance
from customs authorities of exporting country hence till the customs clearance
its remains functional, In other words this is the classification of financing on
the basis of the stage of the consignment for export, and the phase in which
right from the point of procurement of an export order up to the time and place
when the cargo is unclear by the customs authorities of the Exporting country,
in simple words the pre shipment stage is that stage up to when seller has an
active role to play and that role played by the seller is the legal and factual
obligation of the seller.

Pre-shipment/packing credit means any loan or advance granted or any other

credit provided by a bank to the exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment, capital
expenses towards rendering of services, on the basis of letter of credit opened
in his favour or in favour of some other person, by an overseas buyer or a
confirmed and irrevocable order for the export of goods/services from India
having been placed on the exporter or some other person, unless lodgement of
export order or letter of credit with the bank has been waived.

Further as far as Pre Shipment Financing is concern there are various

important stages even in Pre Shipment where exporters seeks funds for
carrying out the export activities, hence on the basis of the different crucial
turns in an export proceed the important and popular types/heads of Pre
Shipment Export Financing are as follows:

1. Financing for procurement of Raw Material or Semi-finished Goods

This happens to be the first instance of Export Financing where few firms are
seeking the option as export Financing, and this is the preliminary stage in any
Export Order, this enable an export to kick towards start up as far as export
proceed is concern. This financing is most of the times done from the
Commercial Banks upon the guidelines and programmes

2. Packaging Credit

Packing credit refers to the finance granted by Export Financer to an Exporter

which enables an Exporter to pack the goods and keep ready consignment for
dispatch. This form of Export Financing is a short-term operational fund in
advance for smooth transition of an exporter for one export order. Since
packaging is the integral part of the shipment hence it demands for a
considerable expense and specially in International Business packaging is an
expensive affair and to compete in International Market the exporters are at
time struggling in terms of packaging technology and packaging material.
Problem related with the packaging technology is resolved by the Indian
Packaging Institute; however the expense related issues are managed by
exporters independently.

Some Important facts about the Packaging Credit

Eligibility criteria for availing Packaging Credit: Packing credit loan is allowed
only on receipt of confirm export order/contract or Irrevocable Letter of Credit.
The Exporters who are eligible for Packing Credit are listed below:

● Exporters with valid Letter of Credit.

● Exporters with valid Export Order.
● Exporters with valid Export Contract.
● Exporters with reputation and goodwill in the concerned industry.

Period of Advance

1. The period for which a packing credit advance may be given by a bank will
depend upon the circumstances of the individual case, such as the time required
for procuring, manufacturing or processing and shipping the relative
goods/rendering of services. It is It is primarily for the banks to decide the
period for which a packing credit advance may be given having regard to the
various relevant factors so that the period is sufficient to enable the exporter to
ship the goods/ render the services.

2. If pre-shipment advances are not adjusted by submission of export documents

within 360 days from the date of advance, the advances will cease to qualify for
concessive rate of interest to the exporter.
3. RBI would provide refinance only for a period not exceeding 180 days.
Disbursement of Packing Credit
a. Ordinarily, each packing credit sanctioned should be maintained as separate
account for the purpose of monitoring period of sanction and end-use of funds.
b. Banks may release the packing credit in one lump sum or in stages as per the
requirement for executing the order/LC.
c. Banks may also maintain different accounts at various stages of processing,
manufacturing, etc., depending on the types of goods/services to be exported,
e.g., hypothecation, pledge, etc. accounts and may ensure that the other and
finally be proceeds of relative export documents on purchase, discount, etc.
d. Banks should continue to keep a close watch on the end-use of the funds and
ensure that credit at lower rates of interest is used for genuine requirements of
exports. Banks should also monitor the progress made by the exporters in
timely fulfilment of export orders.
Liquidation of Packing Credit:
a. General: The packing credit/pre-shipment credit granted to an exporter
must be liquidated out of proceeds of bill drawn for the exporter commodities
on its purchase,
discount, etc., thereby converting pre-shipment credit into post-shipment credit.
Further, subject to mutual agreement between the exporter and the banker it
can also be repaid/prepaid in exchange earners' foreign currency A/c (EEFC
A/c) as also from rupee resources of the exporter to the extent exports have
actually taken place. If not so liquidated/repaid, banks are free to decide the
rate of interest.
b. Packing credit in excess of export value
i)Where by-product can be exported
Where the exporter is unable to tender export bills of equivalent value for
liquidating the packing credit due to the shortfall on account of wastage
involved in the processing of agro-products like raw cashew nuts, etc., banks
may allow exporters, inter alia, to extinguish the excess packing credit by
export bills drawn in respect of by-product like cashew shell oil, etc.
ii) Where partial domestic sale is involved
However, in respect of export of agro-based products like tobacco, pepper,
cardamom, cashew nuts, etc., the exporter has necessarily to purchase a
somewhat larger quantity of the raw agricultural produce and grade it into
exportable and non- exportable varieties and only the former is exported. The
non-exportable balance is necessarily sold domestically. For the packing credit
covering such non-exportable portion, banks are required to charge commercial
rate of interest applicable to the domestic advance from the date of advance of
packing credit and that portion of the packing credit would not be eligible for
any refinance from RBI.
iii)Export of deoiled/defatted cakes
Banks are permitted to grant packing credit advance to exporter of HPS
groundnuts and defatted/deoiled cakes to extent of the value of raw material
required even though the value thereof exceeds the value of export order
The advance in excess of the export order is required to be adjusted either in
cash or by sale of residual by-products oil within a period not exceeding 30 days
from the dates of advance to be eligible for concessional rate of interest.
c.Banks have, however, operational flexibility to extend the following relaxation
to their exporter clients who have good track record.
1. Repayment/liquidation of packing credit with proceeds of export
documents will continue; however, this could be with export document
relating to any other order covering the same or any other commodity
exported by al exporter. While allowing substitution of contract this way,
banks should ensure that it is commercially necessary and unavoidable.
Banks should also satisfy about the valid reason as to why packing credit
extended for shipment of a particular commodity cannot be liquidated in
the normal method. As far as possible, the substitution of contract should
be allowed if the exporter maintain account With the same bank or it has
the approval of member of the consortium, if any

2. The existing packing credit may also be marked off with proceeds of
export documents against which no packing credit has been drawn by
exporter. However, it is possible that the exporter may avail of EPC with
one bank and submit the document to another bank. In view of this
possibility, banks may extend such facility after ensuring that the
exporter has not availed of packing credit from another bank against the
document submitted.

3. These relaxations should be not extended to transaction

sister/associate/group concerns.

Rupee Pee-shipment Credit to Specific Sectors/Segments

1. Rupee Export Packing Credit to Manufacturer Suppliers for Exports

Routed Through STC/MMTC/Other Export Houses, Agencies, etc.
(a) Banks may grant el ort packing credit to manufacturer suppliers who do not
have export orders/letters of credit in their own name, and goods are exported
through the State Trading Corporation/Minerals and Metal Trading Corporation
or other export houses, agencies, etc.
(b) Such advances will be eligible for refinance, provided the following
requirements are complied with apart from the usual stipulations:
(i) Banks should obtain from the export house a letter setting out the details of
the export order and the portion thereof to be executed by the supplier and also
certifying that the export house has not obtained and will not ask for packing
credit in respect of such portion of the order as is to be executed by the
supplier.
(ii) Banks should, after mutual consultations and taking into account the export
requirements of the two parties, apportion between the two ie, the Export
House and the Supplier, the period of packing credit list which the
concessionary rate of interest is to be charged. The concessionary rates of
interest on the pre-shipment credit will be available up to the stipulated periods
in respect of the export house/agency and the supplier put together.
(iii) The export house should open inland L/Cs in favour of the supplier giving
relevant particulars of the export L/Cs or, orders and the outstanding in the
packing credit account should be extinguished by negotiation of bills under such
inland L/Cs. If it is inconvenient for the export house to open such inland L/Cs in
favour of the supplier: the letter should draw bills on the export house in
respect of the goods supplied for export and adjust packing credit advances
from the proceeds of such bills. In case the bills drawn under such arrangement
are not accompanied by bills of lading or other export documents, the bank
should obtain through the supplier a certificate from the export house at the
end of every quarter that the goods supplied under this arrangement have in
fact been exported. The certificate should give particulars of the relative bills
such as date, amount and the name of the bank through which the bills have
been negotiated.
(iv) Banks should obtain an undertaking from the supplier that the advance
payment, if any, received from the export house against the export order would
be credited to the packing credit account.
2. Export of Consultancy Services
(a) Some of the Indian consultancy firms have taken up export of consultancy
services in connection with the setting up of industrial and other projects in
foreign countries. Where such consultancy services from part of turnkey
projects or joint ventures set up abroad, banks are considering suitable credit
facilities at the pre- shipment and post- shipment stages. The exporters may
need financial assistance from banks even in case where consultancy services
alone are exported, particularly, if no advance payments are received.
(b) Banks may consider granting suitable pre-shipment credit facilities against
consultancy agreement in consultancy firms for meeting the expenses the
technical and other staff employed for the project and purchase of any materials
required for the purpose as well as for export of computer software, both
Standard and custom built software programs, subject to the usual conditions of
packing credit scheme.
(c) While deciding the pre-shipment facilities, advance payments received
against the contract must be taken into account.
(d) Banks may consider issuing suitable guarantees to exporters of consultancy
services of high value with large advance payment, taking into account the
competence of the firm to undertake the assignment in question and other
related aspects
3. Export of IT Service and software
Pre-shipment or post-shipment finance can be provided to exporters of IT and
software services in case of specific orders from abroad. "IT service" is defined
as any service, which results from the use of any IT software over a system of IT
products for realising value addition.
Various segments of Information Technology and Software Industry could be
broadly classified into four categories
(i) Software services and programming services
These services, which are also known as man-power exports, involve deputation
of professionals for delivering programming services at customers' locations
within the country, as well as abroad, under different contracts.
(ii) Project services

(a) Customised software development

These services comprise providing solution to specific problems of the customer
which would be utilised by corporate main frame and minicomputer users.
(b) Systems solution and integration
This involves providing a complete business solution using information
technology. In this integration addresses a business problem of the client and
offers an IT based business solution. The work involves programming, testing,
documenting customised software solution for clients and integration of the
programme with the client's existing IT system as well as with the systems of
the client's parties/associates.
(c) Maintenance of software contract
These contracts cover trouble shooting operations and at times even updation of
software.
(iii)Software products and packages
These comprise of:
(a) Systems software and
(b) Application software.

(iv) Information technology related services (IT service)

IT services such as call centers, mentoring, teleconferencing, telemedicine etc.
result from the use of any IT software over a system of IT products for realising
value additions.
4. Export Credit to Processors/Exporters Agri-Export Zones
(a) Government of India have set up Agri-Export Zones in the country to
promote agri- exports. Agri-Export Oriented units (processing) are set up in
Agri-Export Zones as well as outside the ones and to promote such units,
production and processing have to be integrated. The producer has to enter to
contract farming with farmers and has to ensure supply of quality seeds,
pesticides micro-nutrients and other material to the group farmers from whom
the exporter would be purchasing their products as raw material for production
of the final products for export. The Government, therefore, suggested, that
such export processing units may be provided packing credit under the extant
guidelines for the purpose of procuring and supplying inputs to the farmers so
that quality inputs are available to them which in turn will ensure that only
good quality crops are raised. The exporters will be able to purchase/import
such inputs in bulk, which will have the advantages of economies of scale.
(b) Banks may treat the inputs supplied to farmers by exporters as raw material
for export and consider sanctioning the lines of credit/export credit to
processors/exporters to cover the cost of such inputs required by farmers to
cultivate such crops to promote export of agri- products. The processor units
would be able to effect bulk purchases of the inputs and supply the same to the
farmers as per a pre-determined arrangement.
(c) Banks must ensure that the exporters have made the required arrangements
with the farmers and overseas buyers in respect of crops to be purchased and
products to be exported respectively. The financing banks will also appraise the
projects in Agri-export zones and ensure that the tie-up arrangements are
feasible, and projects would take off within a reasonable period.
(d) They have also to monitor the end-use of funds, viz., and distribution of the
inputs by the exporters to the farmers for raising the crops as per arrangements
made by the exporter/main processor units.
(e) They must further ensure that the final products are exported by the
processors/exporters as per the terms and conditions of the sanction in order to
liquidate the pre-shipment credit as per extant instructions.
It is hereby clarified that credit facilities as detailed above are available to
exporters of Agricultural Products/Agri-Export Oriented Units located outside
the Agri-Export Zones also under the extents export credit guidelines.
Post-Shipment Finance
Post-shipment funding, on the converse, deals with credit obtainable after the
merchandise has been shipped. Pre and Post Shipment stages are critical for
the exporter. He needs funding to get the fabrication going after reception of
the export order. Money is also required to fund the operational capital
expenses for routine day to day activities. Post- shipment funding is required to
meet the financial requirements once shipment is over. Post-shipment finance
can be defined as funding or advance approved by the financer in favour of
exporter after the shipment of goods and before the date of realisation of export
earnings. This includes every advance approved on the precautions or in
thoughtfulness of the sum of duty drawback or any form of receivable in the
type of incentives arriving from government. Upon the shipment of goods, there
is always a delay (time gap) between the goods departure and receipt of
payment, post shipment financing provides extended credit by the financier to
the exporter that makes an exporter eligible to tide over his financial needs
during the time gap mentioned.
'Post-shipment Credit means any loan or advance granted or any other credit
provided by a bank to an exporter of goods/services from India from the date of
extending credit after shipment of goods/rendering of services to the date of
realisation of export proceeds and includes any loan or advance granted to an
exporter, in consideration of, or on the security f any duty drawback allowed by
the Government from time to time.
Post-shipment advance can mainly take the form of-
(i) Export bills purchased/discounted/negotiated.
(ii) Advances against bills for collection.
(iii) Advances against duty drawback receivable from Government.
Post-shipment credit is to be liquidated by the proceeds of export bills received
from abroad in respect of goods exported/services rendered. Further, subject to
mutual agreement between the exporter and the banker it can also be repaid
prepaid out of balances in Exchange Earners Foreign Currency Account (EEFC
A/C) as also from proceeds of any other unfinanced (collection) bills. Such
adjusted export bills should however continue to be followed up for realization
of the export proceeds and will continue to be reported in the XOS statement.
In Post Shipment finance grants can be availed up to 100% as per the invoice
(or FOB value) value Post-shipment finance can be granted up to 100% of the
invoice value but practically it has been seen that only up to 90% funding has
been availed by the exporters in respect to the bills receivable. This credit
actually liquidated through the export bills/value receivable from the overseas
buyer against the payment.
Types/Forms of Post Shipment Finance
1. Negotiation of Export Documents under Letters of Credit
When a export bill is drawn over letter of credit deal, it is the responsibility of
negotiating bank to inspect carefully whether all the documents needed under
L/C presented in accordance to the terms of letter of credit, and if the papers
are as formalities needed and fulfil with all terms of letter of credit merely then
the negotiating depository grants the sum to the exporter.
2. Discount/Purchase of Foreign Bills
If the exporter has not made a deal with in the Letter of Credit with the buyer
and has selected other Documentary Collection methods the seller may request
in writing to the negotiating bank to purchase or discount documents against
the receivables and may avail the immediate funding. Bill may be pinched on
D/A (Documents against acceptance) or may be D/P (ie. Documents against
Payment), and this is term specific associated with the Export Contract between
buyer and seller. Bank provides the documents to the buyers only upon the
payment made by buyer so as to receive the amount that has been financed to
the exporter, hence in this case bank is suppose to be playing a safe attempt
since the title of goods remains with the bank and only gets transferred in case
if the buyer is making payment and for D/A document of designate would be
transferred to the buyer upon endorsement of the acceptance of bill payable.
3. Advances Against the Shipment Sent on Consignment Basis
This is popular in deals when the shipment goes on consignment basis, until the
deal is made in accordance of goods sent on batch, title to the merchandise
stays with the exporter. Consignment exports are taken at par along with
outright deals. Hence rules and regulations from pre-shipment finance valid to
outright sale are evenly applicable to consignment exports.
4. Advances Against the Export Incentives Receivable
Advance against export inducement are approved by bank together at pre-
shipment and post-shipment phase. Advance with in this category is approved if
the exporter is suppose to receive an amount as duty drawback incentive by the
government different schemes, repayment of customs and excise duty and
discrepancy between the native and international costs of raw materials.
5. Advances Due to Undrawn Balances
In cases when the exporter does not characterize the bill for the complete value
of the bill as per custom of trade/commerce in that specific line of trade. A
portion of the bill value is not pinched due to difference in mass, quality and
other issues, not fully settled between the buyer and seller. Buyer settles the
closing price only after completion of inspection and authorization of the goods.
6. Advance Due to Retention Money
In exports cases, in specific capital goods and project exports, importer
withholds a small portion of the bill value towards assurance of performance. If
this remaining amount is payable within 365 days from the date of shipment of
consignment then banks provide advance against such custody money at
nominal rate of interest.
7. Post Shipment Credit/funding in Foreign Currency
The exporter can avail the option of the post-shipment credit in Indian currency
or foreign currency. When the exporter chooses to avail the credit in overseas
currency, the interest rate will be connected to LIBOR (London Inter-Bank
Offered Rate) and therefore credit/financing has to be released in foreign
currency.
8. Buyer Credit/Financing
Within the Buyer Credit Scheme, buyer can extent the credit (finance for seller)
through a financial institution or a consortium of the Financial Institution, thus
an exporter can avail payment immediately, and when the financial or the
consortium institution is located in the exporter's country then there cannot be
any transfer of credit from one country to another since the financial institution
is located in exporter's country makes the remittance in Indian Currency to the
seller and gets the repayment of the credit in foreign currency.
9. Line of Credit
When lot many buyers are situated in the same country then instead of
extension of credit to different Importers a line credit is extended to a financial
institution situated in the Importers country from the financial institution in
sellers country the benefit here is that, the responsibility in sensing the credit
worthiness of different importers and recovery of funds from them is
transferred to that financial organization situated in buyers country. In the
procedure the financial organization/institution extending line of credit in the
seller's country becomes completely free from the doubts associated with
pointing the importers in buyer's nation and recovering credit` from them
Rupee Post-shipment Export Credit
Period
(i) In the case of demand bills, the period of advance shall be the Normal
Transit Period (NTP) as specified by FEDAI.
(ii) In case of usance bills, credit can be granted for a maximum duration of 180
days from date of shipment inclusive of Normal Transit Period (NTP) and grace
period, if any. However, banks should closely monitor the need for extending
post-shipment credit up to the permissible period of 180 days and they should
influence the exporters to realize the export proceeds within a shorter period.
(iii) 'Normal transit period' means the average period normally involved from
the date of negotiation/purchase/discount till the receipt of bill proceeds in the
Nostro account of the bank concerned, as prescribed by FEDAI from time to
time. It is not to be confused with the time taken for the arrival of goods at
overseas destination.
(iv) An overdue bill -
(a) In the case of a demand bill, is a bill which is not paid before the expiry of
the normal transit period, and
(b) In the case of a usance bill, is a bill which is not paid on the due date.
Interest Rate Structure
Interest rate structure on post-shipment credit and instructions in regard
thereto are given below:
General
A ceiling rate has been prescribed for rupee export credit linked to Benchmark
Prime Lending Rates (BPLRS) of individual banks available to their domestic
borrowers. Banks have, therefore, freedom to decide the actual rates to be
charged within the specified ceilings. Further, the ceiling interest rates for
different time buckets under any category of export credit should be on the
basis of the BPLR relevant for the entire tenor of export credit.

ECNOS
ECNOS means Export Credit Not Otherwise Specified in the Interest Rate
structure for which banks are free to decide the rate of interest keeping in view
the BPLR and spread guidelines.
Interest Rate on Rupee Export Credit
a. Interest rate structure:
i.The interest rate structure for rupee export credit applicable for the period
upto 30.4.2007* is as under:
(b) Interest on Pre-Shipment Credit
1. Banks should charge interest on pre-shipment credit upto 180 days, at
the rates to be decided by the bank within the ceiling rate arrived at
based on BPLR relevant for the relevant for the entire tenor of the export
credit under the category. The period of credit is to be reckoned from the
date of advance.
2. If pre-shipment advances are not liquidated from proceeds of bills
proceeds on purchase, discount, etc., on submission of export documents
within 360 days from the date of advance, the advances will cease to
qualify for concessive rate of interest ab initio.
3. In cases where packing credit is not extended beyond the original period
of sanction and export take place after the expiry of sanctioned period
but within a period of 360 days from the date of advance, exporter would
be eligible for concessional credit only upto the sanctioned period. For
the balance period, interest rate prescribed for ECNOS at pre-shipment
stage will apply. Further the reasons for non-extension of the period need
to be advised by banks to the exporter.
4. In cases where exports do not take place within 360 days from the date of
shipment advance, such credits will be termed as 'Export Credit Not
Otherwise Export Credit Not Otherwise Specified' (ECNOS) and banks
may charge interest rate prescribed for 'ECNOS - pre-shipment from the
very first day of the advance.
5. If exports do not materialise at all, banks should charge on relative
packing credit domestic lending rate plus penal rate of interest, if any, to
be decided by the banks on the basis of a transportation policy approved
by their board.
(c) Interest on post-shipment credit
In the case of advances against demand bills, if the bills are realised before the
expiry of the normal transit period (NTP), interest at the concessive rate shall
be charged from the date of advance till the date of realisation of such bills. The
date of realisation of demand bills for this purpose would be the date on which
the proceeds get credited to the banks' Nostro accounts,
In the case of advance/credit against usance export bills, interest at concessive
rate may charged only upto the notional/actual due date or the date on which
export proceeds get credited to the bank's Nostro account abroad, whichever is
earlier, irrespective of the date of credit to the borrower's/exporter's account in
India. In cases where the correct due date can be established
before/immediately after availment of credit due to acceptance by overseas
buyer or otherwise, concessive interest can be applied only upto the actual due
date, irrespective of whatever may be the notional due date arrived at, provided
the actual due date falls before the notional due date.
Where interest for the entire NTP in the case of demand bills or upto
notional/actual due date in the case of usance bills as stated at (b) above, has
been collected at the time of negotiation/purchase/discount of bills, the excess
interest collected for the period from the date of realisation to the last date of
NTP/notional due date/ actual due date should be refunded to the borrowers.
Advances Against Undrawn Balances on Export Bills
In respect of export of certain commodities where exporters are required to
draw the bills on the overseas buyer up to 90 to 98 per cent of the FOB value of
the contract, the residuary amount being 'undrawn balance is payable by the
overseas buyer after satisfying himself about the quality/quantity of goods.
Payment of undrawn balance is contingent in nature. Banks may consider
granting advances against undrawn balances at concessional rate of interest
based on their commercial judgment and the track record of the buyer. Such
advances are, however, eligible for concessional rate of interest for a maximum
period of 90 days only to the extent these are repaid by actual remittances from
abroad and provided such remittances are received within 180 days after the
expiry of NTP in the case of demand bills and due date in the case of usance
bills. For the period beyond 90 days, the rate of interest specified for the
category ECNOS' at post-shipment stage may be charged.
Export on Consignment Basis
(i) General
a. Export on consignment basis lends scope for a lot of misuse in the matter of
repatriation of export proceeds.
b. Therefore, export on consignment basis should be at par with exports on
outright sale basis on cash terms in matters regarding the rate of interest to be
charged by banks on post-shipment credit. Thus, in the case of exports on
consignment basis, even if extension in the period beyond 180 days is granted
by the Foreign Exchange Department for repatriation of export proceeds, banks
will charge appropriate concessive rate of interest only up to the notional due
date (depending upon the tenor of the bills),subject to a maximum of 180 days.
(ii) Export of precious and semi-precious stones
Precious and semi-precious stones, etc., are exported mostly on consignment
basis and the exporters are not in a position to liquidate pre-shipment credit
account with remittances received from abroad within a period of 180 days
from the date of advance. Banks may, therefore, adjust packing credit advances
in the case of consignment exports, as soon as export takes place, by transfer of
the outstanding balance to special (post shipment) account which in turn,
should be adjusted as soon as the relative proceeds are received from abroad
but not later than 180 days from the date of export or such extended period as
may permitted by Foreign Exchange Department, Reserve Bank of India.
Balance in the special (post-shipment) account will not be eligible for refinance
from RBI.

(iii)Consignment exports to CIS and East European Countries.

a. RBI (FED) is allowing in deserving cases, on application by individual
exporters with satisfactory track record, a longer period of up to 12 months for
realization of proceeds of export on consignment basis in convertible currencies
to CIS (former USSR) and East European Countries. Banks may extend post-
shipment credit to such exporters for a longer period ab initio. Accordingly, the
interest rate applicable will be as follows:

Period of post-shipment finance Rate of Interest

Upto 90 days from the date of The rate applicable for usance bills
advance for period upto 90 days.

Beyond 90 days and upto 12 months Banks are free to decide on the rate
from the date of shipment. of interest.

b. It is expected that sales proceeds of goods exported on consignment basis to

the above countries would be realized within the permitted period of up to 12
months and post-shipment credit liquidated. In case the sale proceeds are not
realised within the said period, the higher rate of interest as applicable for bills
realised beyond 6 months from the date of shipment i.e., ECNOS - Post-
shipment will apply for the entire period beyond 6 months.
c. Refinance to banks against export credit would, however, be available from
RBI upto a period of 180 days only each at pre-shipment and post-shipment
stages.
(iv) Consignment exports to Russian Federation against repayment of State
Credit in rupees
a) RBI (FED) is allowing on application, Export Houses/Trading Houses/Star
Trading Houses/Super Star Trading Houses with satisfactory track record, a
longer period of up to 360 days from the date of shipment for realisation of
proceeds of exports of permitted goods as announced by them from time to time
to the Russian Federation on consignment basis against repayment of State
Credits in rupees. For the procedure to be followed, reference may be made to
AD (GP Series) Circular No. 5, dated May 31, 1999 and subsequent instructions,
if any, issued in this regard by Foreign Exchange Department, Reserve Bank of
India. Banks may extend post-shipment credit to such exporters for a longer
period ab initio. Accordingly, the interest rate applicable will be as follows:

Period of post-shipment finance Rate of interest

Upto 90 days from the date of The rate applicable for usance bill for
advance period upto 90 days.

Beyond 90 days and upto 360 days Banks are free to decide on the rate
from the date of shipment.
 of interest.

b) In case, sale proceeds are not realised within the said period, the higher rate
of interest as applicable for bills realised beyond 6 months from the date of
shipment will apply for the entire period beyond 6 months.
c) The refinance to banks against export credit would, however, be available
from RBI upto a period of180 days only each at pre and post shipment stages.

Export Credit Guarantee Corporation of India (ECGC)

As domestic or home trade is surrounded by many risks, in the same way
International trade is also surrounded by different type of risk.
Types of Risks
The business of export and import is not risk free and exporters and importers
face a lot of risk in their trade activities. There are many risks that make export-
import business difficult These risks can be categorised as follows -
a. Commercial risk
b. Political risk
c. Legal risk
d. Transport risk
e. Credit risk
f. Foreign exchange risk, etc.
Let us look at all of them in detail below
a. Commercial Risk - The risk arising out of lack of knowledge about foreign
party and markets and his ability to make the payment of the goods purchased
by him, is called Commercial risk. Every party faces it and hence they need to
do proper research and gain insights about parties and countries they are going
to deal with in order to safeguard against such risk..
b. Political Risk - The risk arising out of changing political conditions,
breakage of war between countries, civil movements, capture of ships during
war times etc. is called political risk. Political risk is uncontrollable by foreign
traders and can only be managed by them by avoiding trade during war times
and with those countries at the time when their political conditions witness
changes. It also includes the changing political scenarios in a country because
of change in the party in power in a country because each political party has a
set of thoughts, which it implements after it comes to power.
c. Legal Risk - The risk arising out of difference in and changing laws in
foreign countries which make pursuing and carrying-on international trade with
parties of that country is called legal risk. Under this type of risk, changes in
policies by foreign governments and local authorities make doing business with
parties residing there very difficult. It involves imposition of strict and difficult-
for-business laws like tariffs and quotas, etc. which discourage and restrict
foreign trade.
d. Transport Risk - The risk arising during transportation of goods from one
country to another is called transport risk. This category of risks involves -
i.Marine Perils like earthquakes, lightning fall, sea storms, entry of water into
ships, fire, collisions, etc. during journey.
ii. War and pirates Perils including civil war, attack by pirates, etc.
e. Credit Risk - The risk arising out of the inability and unwillingness of foreign
buyer to make the payment on the due date is called Credit risk. It can also
occur due to difficulties in realising the payment of credit due to operational
and transactional problems. Credit risk is amongst the most common risk faced
by parties in foreign trade. It can be avoided and managed by taking credit
insurance from organisations like ECGC, which offer various schemes for
protecting the interests of exporters in India.
f. Foreign Exchange Risk - The risk which occurs when a financial transaction
is made in a currency other than the domestic currency of a party is called
Foreign Exchange Risk. It occurs because of the exchange rate between two
currencies, which keep on changing and do not remain constant for very long. It
happens in the way that changing foreign exchange rate can change a certain
amount of foreign currency to be received from an export transaction because
of more or less amount of domestic currency that would be received against it.
Foreign exchange risk is manageable with techniques like forward contracts,
hedging, etc. which safeguard an exporter from risk of loss.
Export Credit Guarantee Corporation of India (ECGC)
Export Advisory Council in 1953 took the initiative for Export Credit Guarantee
Scheme, In 1957 Export Risk Insurance Corporation (ERIC) was established
considering the recommendations of Kapur Committee with an authorised
capital of Rs. 5 Crores and a paid up capital of Rs 25 Lakhs, 1962-1964 was the
phase of introduction to insurance covers for Banks and during this period the
name of Export Risk Insurance Corporation (ERIC) was changed to "Export
Credit & Guarantee Corporation Ltd." in 1964, in 1983 again the "Export Credit
& Guarantee Corporation Ltd." was renamed as "Export Credit Guarantee
Corporation of India Ltd. and finally in 2014 it was named again as ECGC Ltd
with a head office located at Mumbai and is a wholly owned subsidiary of
Government of India. ECGC hold a vision to provide the Export Credit Insurance
and other Trade related services to Exporters.
Apart from other perils that are covered by the Marine & Cargo Insurance there
exist risk attached with the payment receivable from buyer after shipment,
Exporters face uncertainty like what if buyer is unable to Import in condition
the Importing country's Government kept prohibition on the product or service?
Or after arrival and possession of shipment buyer files for Bankruptcy? Or in
any other situation Importing country is putting restriction that the country of
Export should not be the country to Import? Such questions can easily managed
by the Export Credit Insurances. Prime areas of coverage under the Credit
Insurance from EGCC are to dominate the following:
● Commercial Risk
● Political Risk
Scope of Export Credit Insurance
Payments in exports are released to risks. The risks have whispered large
proportions today due to the extensive political and economic changes, which
are comprehensive to the world. An epidemic of war or civil war may block or
setback compensation for goods exported. A takeover or a rebellion may also
bring about the similar result. Economic problems or balance of payment
problems may lead a country to force restrictions on either import of certain
products or on transmission of payments for goods purchased. Over and above
to this exporters have to export under commercial risks of bankruptcy or
protracted failure to pay of buyers. The commercial risks of a foreign purchaser
going bankrupt or losing his ability to pay are bothered due to the political and
economic uncertainties. Export credit insurance is intended to protect exporters
from the consequences of the payment risks, equally political and commercial,
and to facilitate them to expand their Export/overseas business without alarm of
losses.
ECGC Objectives are listed as
1. Encourage and facilitate the globalization of India's trade with a line of
action.
2. Assist Indian exporters to minimise credit risks through provision of on time
information related with worthiness/reliability of the buyers, bankers and the
countries.
3. Protect the Indian exporters from unexpected losses, and from such reason
due to which buyer fails to make payment for the shipment imported, bank or
problems rising due to the country of the buyer with the help of cost effective
and customised Credit Insurance covers in the form of Insurance Policy,
Factoring or Investment Insurance Services equivalent to similar covers offered
to exporters in other nations.
4. Facilitate accessibility of tolerable bank finance to the Indian Exporting firms
with a provision of surety insurance covers for bankers at reasonable rates.
5. Achieve better performance in terms of profitability, economic and
functioning efficiency indicators and attain optimum return on investment.
6. Develop International expertise in credit insurance among employees,
achieve continuous modernism, and attain the utmost customer satisfaction by
delivering finest quality service.
7. Educate the clients by continuous campaign as publicity and result oriented
marketing.
Services of ECGC
The services from ECGC can be broadly classified into following three
categories:
● A Export Credit Insurance for Exporters
● Export Credit Insurance for Banks
● Special Schemes

Export Credit Insurance for Exporters:

This aims the assistance and Insurance cover to Exporters up to 90% from the
credit risk in the form or due to Political and Commercial Risk, under this Credit
Risk minimisation Exporters are kept under credit risk cover with the Standard
Policy and Specific Policy. Few important versions of Export Credit Insurance
for Exporters are as follows:
● Shipments Comprehensive Risk Policy (Standard Policy)
● Small Exports Policy
● Specific Shipment Policy Services Policy
● Export Turn Over Policy

Export Credit Insurance for Banks

Few important Credit Insurance Covers for banks from ECGC can be
summarized as: Short Term (Pre Shipment) Short Term (Post Shipment)
Short Term
Cover against Bank Guarantee
Medium & Long Term Credit Insurance to Banks

Special Schemes
Almost after filing the requirement for Exports and Banks associated in Export
Financing and assistance, ECGC with this category tries to cater areas as
follows:
● Factoring.
● Buyer's Credit Cover.
● Line of Credit Cover.
● Overseas Investment Insurance.
● Customer Specific Cover.
● National Export Insurance Account (NEIA).

SERVICE POLICY
Where Indian companies conclude contracts with foreign principals for
providing them with technical or professional services, payments due under the
contracts are open to risks similar to those under supply contracts. In order to
give a measure of protection to such exporters of services, ECGC has
introduced the Services Policy.
What are the different types of Services Policy and what protection do they
offer?
● Specific Services Contract (Comprehensive Risks) Policy
● Specific Services Contract (Political Risks) Policy
● Whole-turnover Services (Comprehensive Risks) Policy
● Whole-turnover Services (Political Risks) Policy
Specific Services Policy, as its name indicates, is issued to cover a single
specified contract. It is issued to provide cover for contracts, which are large in
value and extend over a relatively long period. Whole-turnover services policies
are appropriate for exporters who provide services to a set of principles on a
repetitive basis and where the period of each contract is relatively short. Such
policies are issued to cover all services contracts that may be concluded by the
exporter over a period of 24 months ahead. The Corporation would that the
terms of payment for the services are in line with customary practices in
international trade in these lines. Contracts should normally provide for an
adequate advance payment and the balance should be payable periodically
based on the progress of work. The payments should be backed by satisfactory
security in the form of Letters of Credit or bank guarantees. Services policies
are designed to cover contracts under which only services are to be rendered.
Contracts under which the value of services to be rendered forms only a small
part of a contract involving supply of machinery or equipment will be covered
under an appropriate specific policy for supply contracts.
EXPORT TURN OVER POLICY (ETP)
Turnover Policy is for the benefit of large exporters who contribute not less than
Rs.20 lakhs per annum towards premium based on projection of the export
turnover of the policyholder for a year. This is a Whole turnover declaration
based Policy wherein all shipments are required to be covered under the Policy.
Policy is for a period of 12 months. 90% of the FOB value is covered in this
policy.
Exclusions Permitted
● Exports to Associates
● Shipments backed by Letters of Credit

Risks Covered
● Commercial Risk / Buyer Risk
● Political Risk
● L/C Opening Bank Risk
Important Obligations of the Exporter
 ● Obtaining valid credit limit on buyers and banks from ECGC.
● Premium is payable in four equal quarterly installments in advance
before commencement of risks and sufficient premium deposit is also to
be maintained in advance based on the turnover projection at all times
during the policy.
● Submission of Monthly declaration of shipments by 15th of the
subsequent month. Notifying/Declaration of payments for bills that have
remained unpaid beyond 30 days.
● from its due date of payment, by the 15th of the subsequent month
● Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
● Initiating recovery steps including legal action.
● Sharing of recovery.

Key features of Export Turn over Policy

● Higher percentage of cover.
● Competitive premium rate.
● No Claim Bonus (NCB) of 5% subject to no claim, up to a maximum of
50%.
● A turnover discount in the standard premium rate is offered subject to
the total discount including NCB being not less than 20% to those
exporters whose net annual premium payable exceeds Rs. 20 lacs.
● Additional discount in standard premium rate is offered if the actual
premium exceeds beyond 10% of the projected premium.
● Discrepancies cover for L/C transactions subject to certain conditions.
● Automatic cover for resale/reshipment up to 25% of Gross Invoice Value
(GIV).
● Availability of Discretionary Limits on buyers on conditions.
● Cover for Merchant trade with prior approval by making necessary
endorsement.

EXPORTS (SPECIFIC BUYERS) POLICY

The Specific Buyers Policy provides cover for shipments made to a particular
buyer or on LC opening bank for a set of buyers. Exporters not holding the
Standard Policy/Whole turnover Policy can avail of this to cover their shipments
to one or more buyers. Exporters holding Standard Policy can also avail of this
policy for covering shipments to individual buyers, if all shipments to such
buyers have been permitted to be excluded from the purview of the Standard
Policy. Policy is valid for period of 12 months.
Risks Covered
● Commercial Risk / Buyer Risk
● Political Risk
● L/C Opening Bank Risk
Key Obligations of the Exporter
● Processing fee (non-refundable) is payable.
● Premium is payable in four equal quarterly installments in advance
before commencement of risk and sufficient premium deposit is also to be
maintained in advance based on the turnover projection at all times
during the policy.
● Submission of Monthly declaration of shipments by 15th of the
subsequent month.
● Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the
subsequent month.
● Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
● Initiating recovery steps including legal action.
● Sharing of recovery.

Prime Characteristics
● Selective buyer can be insured.
● All other exports, if any, not to be declared.
● No Claim Bonus (NCB) of 5% subject to non claim, up to a maximum of
50%.
● Separate Policy per buyer
CONSIGNMENT EXPORTS POLICY (STOCKHOLDING AGENT)
A method increasingly adopted by Indian exporters is to have an agency
agreement with independent and separate entities, which receive and hold
stocks ready for sale to overseas buyers as and when orders are received, finds
buyers and sells to them in consideration of a commission on such sales. Thus, a
separate credit insurance policy as CSA is introduced to cover exclusively
shipments made by exporters on consignment basis to their agent. Policy is
valid of 12 months. 90% of the amount is covered for Standard Policy holder
and 80% for others.
Risks Covered
● Commercial Risk on Stockholding Agent and/or ultimate buyers
● Political Risk
Important Obligations of the Exporter
● Processing fee (non-refundable) is payable.
● Premium is payable on quarterly or monthly basis in advance before
commencement of risks and sufficient premium deposit is also to be
maintained in advance based on the turnover projection at all times
during the policy.
● Obtaining credit limit on ultimate buyers beyond the discretionary limit.
● Submission of Monthly declaration of shipments by 15th of the
subsequent month along with statement of the stock with the agent and
details of sales effected to the ultimate buyers.
 ● Filing of claim within 360 days from the due date of the export bill or 600
days from expiry date of the Policy Cover whichever is earlier.
● Initiating recovery steps including legal action.
● Sharing of recovery.
Highlights
● Covers only the exports affected under consignment sale. Extended
period for realization up to 360 days.
● Automatic cover on ultimate buyers up to discretionary limits subject to
buyers being in a country placed in Open Cover category and not in the
list of buyers on whom the Corporation has adverse information referred
to as Buyer Specific Approval List (BSAL).
● Commercial risks on agents covered.
● No Claim Bonus (NCB) of 5% subject to no claim, up to a maximum of
50%.

BUYER EXPOSURE POLICY (BEP)

The Buyer Exposure Policy is to insure exporters having a large number of
shipments to a particular buyer with simplified procedure and rationalized
premium. An exporter cat choose to obtain exposure based cover on a selected
buyer. The cover would be against commercial and political risks. The option to
exclude L/C shipment is available. If L/C shipment has been opted for
commercial and political risks cover, failure of L/C opening bank with World
Rank up to 25000 as per latest Banker's Almanac is available. If exporter opts
for only political risks, premium at lesser rate is offered. Policy is valid for 12
months. It covers 90% of the amount for standard policyholder and 80% for
others.
Risks Covered
● Commercial Risk/ Buyer Risk
● Political Risk
● L/C Opening Bank Risk

Important Obligations of the Exporter

● Processing fee (non-refundable) is payable.
● Upfront premium payment in full on the Loss Limit.
● Obtaining prior approval for extending the due date of payment of the
export bill where the total credit period of realization exceeds180 days.
● Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the
subsequent month.
● Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
● Initiating recovery steps including legal action.
● Sharing of recovery
Highlights
 ● Protection is available up to the Loss Limit approved on the buyer under
the Policy.
● Premium is payable only on the Loss Limit approved on the buyer,
irrespective of the shipments effected to the buyer.
● No Claim Bonus (NCB) of 5% subject to non claim, up to a maximum of
50%.
● Declaration procedure waived.
● Separate Policy per buyer.
● Selective buyer can be insured.
IT ENABLED SERVICES POLICY-SINGLE CUSTOMER
IT-enabled Services (Single Customer) Policy would be given in respect of
contracts for rendering service during a defined period with billing on the basis
of service rendered during a period say, a week, a month or a quarter. One
policy for one buyer shall be issued. Policy is valid for 12 months. It covers the
90% of the FOB value.
Risks Covered
● Commercial Risk/Buyer Risk
● Political Risk
● L/C Opening Bank Risk
Distinct Characteristics OF ITES Contracts
● Contract is for providing certain service during a defined period.
● Billing for the service rendered at a pre-determined interval.
● Where there is a non-payment problem, there can be certain services
invoiced and accepted, certain services invoiced but not accepted and
certain services rendered but yet to be invoiced.
● No requirement of physical documentation as the process is carried out
through
● electronic media.
● Provision for correction in case of errors and omissions.
● Filing of claim within 360 days from the due date of the export bill or 600
days from expiry date of the Policy Cover whichever is earlier.
● The policy will be offered for contracts, which contain standard terms and
conditions as per the norms and practices of the IT-enabled Services
export industry.
● Right to verify documents by the Corporation or by an authorized agency.

Important Obligations of the Exporter

● Processing fee (non-refundable) is payable.
● Upfront premium payment in full on the Loss Limit.
● Monthly declaration indicating the services rendered, invoices raised and
invoices paid to be submitted by the exporter by 15th of the subsequent
month.
● No separate overdue report.
● Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
 ● Initiating recovery steps including legal action.
● Sharing of recovery.

Highlights
● Protection is available up to the Loss Limit approved on the buyer under
the Policy.
● Premium is payable only on the Loss Limit approved on the buyer,
irrespective of the shipments effected to the buyer.
● Separate Policy per buyer.
● No Claim Bonus (NCB) of 5% subject to no claim, up to a maximum of
50%.
MICRO EXPORTERS POLICY (MEP)
ECGC introduced a Policy exclusively for the SME sector units in 4th July, 2008.
It had undergone a modification and was rechristened as Micro Exporters Policy
(MEP) in 2014 by making the product more attractive with improved cover.
MEP is an exposure based Policy. All exporters including Traders,
Manufacturers and Service providers, irrespective of MSME Certificate, shall be
eligible for the Policy subject to their export turnover up to Rs.100 Lakh.
Risks covered on the overseas buyers and L/C opening Bank
(Commercial Risk)
● Insolvency of the buyer.
● Failure of the buyer to make the payment due within a specified period,
normally 2
● months from the due date.
● Buyer's failure to accept the goods, subject to certain conditions.
Insolvency of the L/C Opening bank
● Failure of the L/C opening bank to make the payment due within a
specified period normally 2 months from the due date.
Risks covered (Political Risk)
● Imposition of restriction by the Government of the buyer's country or any
Government action, which may block or delay the transfer of payment
made by the buyer.
● War, civil war, revolution or civil disturbances in the buyer's country. New
import restrictions or cancellation of a valid import license in buyer's
country.Interruption or diversion of voyage outside India resulting in
payment of additional freight or insurance charges which cannot be
recovered from the buyer.
● Any other cause of loss occurring outside India not normally insured by
general insurers, and beyond the control of both the exporter and the
buyer.

The features of the MEP Policy are:

● Policy period : 12 months
 ● Processing Fees
● Report of overdue: more than 60 days from the due date
● Waiting period : 2 months from the due date or extended Due date.
● Percentage of cover: 90%

SOFTWARE PROJECT POLICY

Software Project Policy provides protection to exporters of software and
related services where the payments will be received in foreign
exchange. Under SPP, supply of software products and packages, or
staffing and programming services or both off-shore and on-site
development is covered. It is meant for each contract for a particular job.
Period of policy depends on the contract of exporter with the buyers.
Amount covered under this policy is 80%.
Risks Covered
● Commercial Risk / Buyer Risk
● Political Risk
● L/C Opening Bank Risk

Distinct Characteristics of ITES Contracts

● Billing for the service rendered mostly on milestones progress
report.
● Exact due dates not possible.
● Where there is a non-payment problem, there can be certain
services invoiced and accepted, certain services invoiced but not
accepted and certain services rendered but yet to be invoiced.
● No requirement of physical documentation as the process is
carried out through
● electronic media.
● Provision for correction in case of errors and omissions.
● No salvage in almost all the cases.
● Right to verify documents by the Corporation or by an authorized
agency.

Important Obligations of the Exporter

● Processing fee (non-refundable) is payable.
● Upfront premium payment in full on the Loss Limit.
● Exporter would be required to submit a progress report indicating
the level of completion, payment sought and payment received and
deviations in these areas.
● The exporter has to specify in advance the manner in which the work in
progress would be estimated.
● Filing of claim within 360 days from the due date of the export bill or 540
days from the expiry date of the Policy Cover, whichever is earlier.
● Initiating recovery steps including legal action.
 ● Sharing of recovery.

Highlights:

● Protection is available up to the Loss Limit approved on the buyer under

the Policy.
● Premium is payable only on the Loss Limit approved on the buyer,
irrespective of the shipments effected to the buyer.
● Separate Policy per buyer.

CONSTRUCTION WORKS POLICY

Construction Works Policy is designed to provide cover to an Indian contractor

who executes a civil construction job abroad. The distinguishing features of a
construction contract are:

a. The contractor keeps raising bills periodically throughout the contract period
for the value of work done between one billing period and another. b. To be
eligible for payment, the bills have to be certified by a consultant or supervisor
engaged by the employer for the purpose. c. That, unlike bills of exchange
raised by suppliers of goods, the bills raised by the contractor do not represent
conclusive evidence of debt but are subject to payment in terms of the contract
which may provide, among other things, for penalties or adjustments on various
counts.

The scope for disputes is very large. Besides, the contract value itself may only
be an estimate of the work to be done since the contract may provide for cost
escalation, variation contracts, additional contracts, etc. It is, therefore,
important that the contractor ensures that the contract is well drafted to
provide clarity of the obligations of the two parties and for resolution of
disputes that may arise in the course of the execution of the contract.
Contractors are well advised to use the Standard Conditions of Contract
(International) prepared by the Federation International Des Ingenieurs
Conseils (FIDIC) jointly with the Federation International du Batiment et des
Travaux Publics (FIBTP). 85% of the amount is covered in this policy.

Risk covered by Construction Works Policy:

● Insolvency of the employer (when he is a non-Government entity);

● Failure of the employer to pay the amounts that become payable to the
contractor in terms of the contract, including any amount payable under
an arbitration award;
● Restrictions on transfer of payments from the employer’s country to India
after the employer has made the payments in local currency;
● Restrictions on transfer of payments from the employer’s country to India
after the employer has made the payments in local currency;
● Failure of the contractor to receive any sum due and payable under the
contract by reason of war, civil war, rebellion, etc.;
● The failure of the contractor to receive any sum that is payable to him on
termination or frustration of the contract if such failure is due to its
having become impossible to ascertain the amount or its due date
because of war, civil war, rebellion, etc.;
● Imposition of restrictions on import of goods or materials (not being the
contractor’s plant or equipment) or cancellation of authority to import
 such goods or cancellation of export license in India, for reasons beyond
his control; and
● Interruption or diversion of voyage outside India, resulting in his
incurring in respect of goods or materials exported from India, of
additional handling, transport or insurance charges, which cannot be
recovered from the employer.

Important Obligations:

● Obtain indicative premium rate at bid stage

● Obtain in-principle approval
● Seek cover after payment of premium
● Declaration of overdue payments
● Filing of claim within 12 months from due date
● Sharing of recovery

Highlights:

● Cover can be either for political or comprehensive risks

● Cover for full insurable value including retention portion
● Cover for third country exports as well
● Premium can be paid in installments
● Reduced loss coverage with proportionate reduction in premium
● Reduced premium for projects funded by Multi-lateral agencies.

SPECIFIC POLICY OF SUPPLY CONTRACT

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

insurance for the regular flow of an exporter's shipments 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 and they involve medium/long-term credits. Such transactions
are, therefore, insured by ECGC on a case-to-case basis under Specific Contract
Policies. All contracts for export on deferred payment terms and contracts for
turnkey projects and construction works abroad require prior clearance of
Authorized Dealers, EXIM Bank or the Working Group in terms of powers
delegated to them as per exchange control regulations (Kindly refer to ‘Projects
Exports Manual’ of Reserve Bank of India. Applications for the purpose are to
be submitted to the Authorized Dealer (the financing bank), which will forward
applications beyond its delegated powers to the EXIM Bank. Proposals for
Specific Policy are to be made to ECGC after the contract has been cleared by
the Authorized Dealer, EXIM Bank or the Working Group, as the case may be.
90% is the loss coverage under this policy.

Risk Covered:

● Insolvency of buyer
● Protracted default of buyer
● Buyer’s failure to accept goods
● War, Civil War, Revolutions in buyer’s country
● New Import restrictions
● Transfer delays
● Insolvency
● Default
Important Obligations:

● Obtain indicative premium rate at bid stage

● Obtain in-principle approval
● Seek cover after payment of premium
● Declaration of overdue payments
● Filing of claim within 12 months from due date
● Sharing of recovery

Highlights:

● Cover can be either for political or comprehensive risks

● Add on pre-shipment risk cover can also be obtained
● Cover for full insurable value including retention portion
● Cover for third country exports as well
● Premium can be paid in installments
● Reduced premium for projects funded by Multi-lateral agencies.

SPECIFIC SERVICES POLICY

Where Indian companies conclude contracts with foreign principals for

providing them with technical or professional services, payments due under the
contracts are open to risks similar to those under supply contracts. In order to
give a measure of protection to such exporters of services, ECGC has
introduced the Services Policy. A wide range of services like technical or
professional, hiring or leasing can be covered under these Policies. Specific
Services Policy, as its name indicates, is issued to cover a single specified
contract. It is issued to provide cover for contracts, which are large in value and
extend over a relatively long period. Whole-turnover services policies are
appropriate for exporters who provide services to a set of principals on a
repetitive basis and where the period of each contract is relatively short. Such
policies are issued to cover all services contracts that may be concluded by the
exporter over a period of 24 months ahead.

The Corporation would expect that the terms of payment for the services are in
line with customary practices in international trade in these lines. Contracts
should normally provide for an adequate advance payment and the balance
should be payable periodically based on the progress of work. The payments
should be backed by satisfactory security in the form of Letters of Credit or
bank guarantees. Services policies are designed to cover contracts under which
only services are to be rendered. Contracts under which the value of services to
be rendered forms only a small part of a contract involving supply of machinery
or equipment will be covered under an appropriate specific policy for supply
contracts. 90% of the amount is covered under this policy.

Forms and offer of Specific Service Policy

● Specific Services Contract (Comprehensive Risks)
● Policy Specific Services Contract (Political Risks)
● Policy Whole-turnover Services (Comprehensive Risks)
● Policy Whole-turnover Services (Political Risks) Policy
Risk Covered
● Insolvency of buyer
● Transfer delays
● War, Civil War, Revolutions in buyer's country
● Protracted default of buyer
● Insolvency
● Default

Important Obligations
● Obtain indicative premium rate at bid stage • Obtain in-principle
approval
● Seek cover after payment of premium
● Declaration of overdue payments
● Filing of claim within 12 months from due date
● Sharing of recovery

Highlights
● Cover can be either for political or comprehensive risks
● Cover for full insurable value including retention portion
● Premium can be paid in installments
● Reduced premium for projects funded by Multi-lateral agencies.
● Reduced loss coverage with proportionate reduction in premium.

QUALITY CONTROL & INSPECTION

Concept of Quality

Quality means the desired and the standard features, utilities and norms that
are attached with a product or service for sale and purchase, Quality has been
defined by various authors in quite traditional manner, however the current
business scenario explain the realistic and more practical definition and
understanding about the Quality and its role in Business.

"Quality is that measurable set of standards in the products or services as

integral or allied part of the sale, which actually re designates the value of sale
able article, this consist of mainly utility, shape, size, quantity fair costing and
other attached features in a product or service"
Even a customer's concern towards recyclability and reusability has started
falling in the Quality parameter.

Quality Control & Inspection in International Business

Quality control has been an integral part of the International Business and this
becomes an unstoppable activity in competitive International business
Environment. Emergence of European Union and other such bugger markets as
regional Economic Integration has led further the significance of Quality in
International Business. International Business is now going sensitive and
delicate due to rise of Quality aspects that are even associated with a
product/service that leave impact on nature and eco system, this mainly is due
to increased level of consciousness among customers in context with the
sustainable development and just a development and its impact over
Environment/Climate.

Quality Control

Quality Control is an attempt by the producer that governs the norms and
procedures that can be used to aim the desired set of utilities, features and
allied expectations out of product or service. In general Quality Control can be
expressed as the conditional set of measures to ensure the desired output.

Objectives of Quality Control

● To establish the desired quality standards which are acceptable to the

customers?
● To discover flaws or differences in the raw materials and the
industrialized processes in order to ensure smooth and uninterrupted
production.
● To evaluate the procedures and processes of manufacturing and suggest
further improvements in their functioning.
 ● To study and settle on the extent of class deviation in a product during
the manufacturing process.
● To analyze in detail the causes responsible for such deviation.
● To undertake such steps those are helpful in achieving the desired quality
of the products.

Quality Certifications that are Popular Worldwide

ISO-International Organization for Standardization founded on 23 February

1947. ISO is an international standard -setting body composed of
representatives from various national standards Institutions/organizations. The
Organization promotes globally proprietary, industrial commercial standards. It
is headquartered in Geneva, Switzerland; it operates in 196 countries (data
updated till 2015).

CE- (Conformite European which means that the product confirms the
European Standards) CE Marking is a mandatory conformity marking for
certain products sold within the European Economic Area from 1985. The CE
marking is also found on products sold outside the EEA that are manufactured
in, or designed to be sold in, the EEA. CE, meaning European Conformity, is a
symbol of free marketability in the European Area. This is most demanded and
popular quality certification in European Union.

ISI- (Indian Standard Institute) It a mark for industrial products in India. The
mark certifies that a product confirms to the Indian Standard, developed by the
Bureau of Indian Standards (BIS), the nation standards body of India. It is
effective since 1955. The ISI mark is compulsory certification for manufactured
goods to be sold in India, like many of the Electrical Appliances like- switches,
electric motors, kitchen appliances, heaters, wiring cables etc., and other
products like- port land cement, LPG cylinders, automotive tyres etc.
AGMARK- It is a certification mark employed on agricultural products in India,
assuring that they conform to a set of standards approved by the Directorate of
Marketing and Inspection, an agency of the govt. of India. It is effective since
1986. The present AGMARK Standards cover quality guidelines for 213 different
commodities spanning a range of pulses, cereals, essential oils, vegetable oils,
fruits and vegetables, and semi-processed products.

FSSAI- (Food Safety and Standards Authority of India). It was established in

2011 and it's Headquarter at New Delhi. FSSAI is an institution/agency of the
Ministry of Health and Family Welfare, Govt. of India. The FSSAI is responsible
for protecting and encouraging/promoting public health through the regulation
and custody of food safety.

Inspection

Inspection can be defined as an act of looking at closely in order to understand

more about it, to find problems, etc. the act of inspecting something, in the
other words it can also be called as examining of object with standard object in
a comparative exercise. An inspection is most generally an organized
examination/judgement or formal evaluation exercise.

Inspection therefore is a process of comparative examination conducted by an

expert of the concerned branch, with an objective to find the real variation from
the promised/standard value. In International Business "Inspection" is crucial
and important at the same time and need a special consideration while pursuing
business with overseas parties.

Statutory Provision of Inspection

The Export (Quality control and Inspection) Act 1963 provides matters connect
quality control and inspection for the development of Export trade. The Act
provides the provision to Central Government of India to establish Export
Inspection council (EIC) for providing guidance and advises to central
government for enforcing the measures of quality control and inspection in
relation to Export commodities. The central government may after consulting
the EIC:

● Notify Commodities which shall be subject to quality control or inspection

to Export.
● Type of quality control and Inspection required for the notified
commodities.
● Fixing standard specification for the notified commodities.

Exemption from Compulsory Pre-shipment Inspection Procedure

With a view to enabling the manufacturers and exporters to take the

responsibility of ensuring quality of export products rather than depending
upon inspection, the existing machinery for enforcement of compulsory quality
control and pre-shipment inspection has been simplified and streamlined by
taking the following steps:

(i) Star trading houses, trading houses and export houses have been
exempted from the purview of compulsory pre-shipment inspection of all
products notified under the Export (Quality Control and Inspection) Act, 1963.

(ii) Units approved by the EIAs under the System of IPQC (In-Process Quality
Control) have been authorised to issue statutory certificates by themselves
instead of Export Inspection Agencies.

(iii) Industrial units set up in EPZ and 100% EOUS have been exempted
from the purview of compulsory pre-shipment inspection.

(iv) Items notified under the Export (Quality Control and Inspection) Act, 1963
have also been exempted from compulsory pre-shipment inspection provided
the exporters have a firm letter from the overseas buyers stating that they
do not want pre- shipment inspection from any official Indian inspection agency.
Exemption in ISI Mark/Agmark Units

151 Mark/Agmark is invariably recognised as a mark of adequate quality for

export purposes. Products having 151 certificate mark or Agmark are not
required to be inspected by an agency. As such, these products do not fall
within the purview of the export inspection agency net-work. The customs
authorities allow export of such goods even if not accompanied by any Pre-
shipment Inspection Certificate, provided they are otherwise satisfied that the
goods carry ISI certification mark or Agmark label.

Inspection by Buyer's Agency/Specifications

At times foreign buyers lay down their own standards/specifications which may
or may not be in consonance with the Indian standards including the
stipulations under the Quality Control Regulations. Similarly, the overseas
buyers may nominate their own agencies/persons to supervise the production of
goods and/or carry out inspection before shipment. As stated earlier in this
book, these issues need to be got clarified before the confirmation of order, to
manufacture the goods according to foreign buyers requirements.

Guidelines for Exporters under WTOs Pre-shipment Inspection

Programme

The World Trade Organization (WTO) Agreement on Pre-shipment Inspection

(PSI) outlines the procedures to be followed by PSI companies when carrying
out government mandated pre-shipment inspections. It is intended to provide
exporters with transparency concerning the pre-shipment inspection
requirements and enable exporters to speedily resolve disputes with PSI
companies.
Exporters who feel that the PSI Company has not complied with the provisions
of the Agreement on Pre-shipment inspection should, in accordance with Article
2.21 thereof, appeal to the administrative office of the PSI company which
carried out the inspection. If, after appealing to the PSI Company, the exporter
is still dissatisfied, he may refer the dispute to an Independent Entity which will
form a panel to carry out an independent review in accordance with the
provisions of Article 4 of the Agreement on PSI. The Independent Entity (IE),
which has been established as a subsidiary body of the WTO Council for Trade
in Goods, is located at the WTO Secretariat in Geneva, Switzerland. The
International Federation of Inspection Agencies (IFIA), representing pre-
shipment inspection agencies, and the International Chamber of Commerce
(ICC), representing exporters, have been jointly appointed to assist the IE with
various tasks including provision of information to exporters concerning the
independent review procedures and the preparation/updating of the List of
Experts from which the independent review panelists will be selected.

<

With the joint efforts of ICC, IFIA and WTO, an exclusive document has been
prepared for giving necessary guidelines, alongwith a list of experts for PSI
independent review, and text of the WTO Agreement on Pre-shipment
Inspection. This document is available with ICC India, Federation House,
TansenMarg, New Delhi- 110 001. The guidelines contain :

● The rules of procedures for the Operation of Independent Reviews;

● An application form for a request for an Independent Review;
● A response forum to a request for an Independent Review; and
● Instructions for an Advanced Deposit Tariff to be submitted to the
Independent Entity in the event an Independent Review is requested. The
document would be valuable for Indian exporters who wish to know what
to do in case of complaints against pre- shipment inspection agencies.

Inspection Agencies
Export Inspection Council (EIC) is an official body of the Government of India,
which has been established under the Export (Quality control and Inspection)
Act 1963 for advising the government on Quality Control and Inspection
specification for the development and growth of export trade from India.

The Central Government has established five Export Inspection Agencies (EIA)
with head quarters at Mumbai, Kolkata, Kochi, Delhi and Chennai. EIA functions
under the technical and administrative control of EIC. It is an autonomous body
established by government of India for implementation of polices issued by
government related to quality control and inspection of Export commodities.
Commodities under Compulsory Pre-Shipment Inspection
More than one thousand commodities has been declared by central government
which come under the compulsory pre-shipment inspection the major
commodities fall under groups of food and agriculture, fisheries, minerals,
organic and inorganic chemicals, foot wares and footwear products, rubber
products, coir and coir products. The custom authorities will not permit
clearance of these items until and unless certificate of pre-shipment inspection
has been received by the organised inspection agency under the Export (Quality
control and Inspection) Act 1963. Following cases are exempt from compulsory
inspection under the Export (Quality control and Inspection) Act 1963:
● Status holder under the Foreign Trade Policy.
● Units approved by Export Inspection Agencies.
● Export Oriented Units (EOU) & Unites in Special Economic Zones.
● Sometimes foreign buyers lay down their own standards which may not
be coming under the preview of Indian standards.
Need and Importance of Inspection and Quality Control in International
Business
An inspection basically lets one examine and make sure that every task that has
been performed correctly and prevents further losses to the business. An
inspection can help to save money in business and keep employees safe and act
as a prominent factor of a business. The need of inspection is must to avoid
future discrepancies.
1. COMPETITIVENESS IN TARGET INTERNATIONAL MARKET THAT
ENSURES THE SUCCESS ABROAD.

2. CUSTOMER LOYALTY AND BRAND EQUITY ESTABLISHMENT IN

TARGET MARKET NEEDED FOR A NEW ENTRANT AND FOR AN
EXISTING PLAYER.

3. REPUTATION OF A CHANNEL PARTNER OR SELLER HIMSELF THAT IS

BEFORE THE CUSTOMER LOYALTY BUILDING IN INTERNATIONAL
MARKET.
 4. COMPLIANCE AND ULTIMATE PROMISE THAT DIFFERENTIATES THE
EXPORTER IN INTERNATIONAL MARKET.

5. COSTS THAT SAVES THE PRODUCERS FROM WARRANTY CLAUSES

AND OTHER REPAIR PROGRAMMES THAT BINDS A SELLER TO OFFER
CUSTOMER ASSISTANCE/SERVICE
Types of Inspection
Inspection is an event that confirms the Quality this can be carried out during
various stages of production or during transit, transit since in International
business is considerably lengthy hence the sequence of Inspection should be as
per the fairness norms that are favourable for buyer and seller.
Following diagrammatical representation explains the types of Inspection on the
basis of the stages that are considered while Inspection is carried out.
1. PRE SHIPMENT INSPECTION FOR SHIPMENT
2. POST SHIPMENT INSPECTION FOR SHIPMENT

1. Pre-Shipment Inspection

Inspection carried out before the shipment departs for country of origin, this
inspection can be carried out since the time of production till the goods are
unclear from the customs authorities in the country of origin. Pre-Shipment
Inspection can be through Third Party or by the Buyer or Buyer's
representative.

Benefits of Pre-Shipment Inspection

1. Exporters could reduce their risks to receive poor quality and non-
compliance goods.
2. Exporters could pursue the production course and take corrective actions
before the production is finished and goods are packed.
3. Exporters could ensure when the production will be finished and when
the goods will be available for the consignment/shipment.
 4. Exporters can get a pre-shipment inspection certificate after passing the
inspection successfully. Some importing countries need pre-shipment
inspection certificate for the import procedures.

Types of Pre shipment Inspection

Pre shipment Inspection is done in three ways:

1. Consignment wise Inspection

2. In-Process Quality Control
3. Self-Certification

Consignment Wise Inspection: under this Inspection, the recognized

inspection agency will inspect each export consignment. Through random
sampling method the sample will be drawn from the consignment ready for
export. The drawn sample will be sent to laboratory for inspecting whether the
export items to be sent acquire the quality standard or not. If the sample drawn
is found fit for export then the whole lot will be given clearance for export but is
the sample drawn are not found fit for export then the whole lot will be
rejected.

The export items found fit for export will be issued an inspection certificate and
depending upon the nature of the item the validity period for which inspection
certificate is valid will be given on the certificate. After the expiry of the validity
period the items need re- inspection to meet out all quality standards for export.

Procedure

Each export consignment need to be inspected by the export inspection agency

(EIA) and the certificate of inspection will be issued by EIA after verifying all
quality norms to be covered separately depending upon the nature of the items.
An application for inspection has to be sent well in advance by the exporter to
the office of the EIA. The EIA is free to conduct the inspection process at any
place of its own choice, but if all the inspection facilities are available at the
premises of the exporter then inspection can be conducted there itself on the
request of the exporter. It is EIA's choice to conduct inspection either at the
exporter's premises or at the port of shipment.

The application of the inspection has to be submitted in duplicate along with the
following documents:

● Demand draft/ Cross cheque as a requisite fee for inspection

● Copy of letter of credit
● Copy of commercial invoice
● Details of export particulars in packaging list
● Copy of the export order/Contract

Certificate of Inspection: After satisfying itself that the consignment of

exportable components complies with the requirements stipulated in the export
contract/order, the inspection agency issues generally within four days of
receipt of intimation for inspection, the necessary certificate of inspection to the
exporter in the prescribed proforma in five copies, The certificate is issued in
the form given at Appendix 29.VI which is an aligned pre- shipment export
document. (Three copies for exporter, original copy for customs use, second
copy for the use of the foreign buyer and the third copy for the Exporter's use.
Fourth copy for Data Bank, Export Inspection Council, New Delhi and the fifth
copy is retained with the agency for their own office record).

In-Process Quality Control

This method lays emphasis on the responsibility of manufacturer in conducting

quality control drills during each and every stage of manufacturing process. The
manufacturer will exercise control over the quality of raw material, process of
manufacturing, equipments to be used, verifying packaging norms and
conducting final testing.Basically manufacturer/Exporter is supposed to do
inspection at various of production. The documentation related to production
process have to be kept in record, to be referred by the officers of Export
Inspection Agency product like chemical goods and Engineering goods are
subject to this type of inspection.

Under this Export Inspection agency will issue an Inspection Certificate for the
approved units/manufacturers/Exporters. The Exporters/Manufacturers
approved under this system of in process quality control may them self-issue the
certificate of inspection but restrict to only those products for which they have
been granted in process quality control (IPQC) facilities.

Executive Instructions for certification by export-worthy units of

products approved by Export Inspection Agenda. (EMS) under In-
Process Quality Control (1PQC) System
Ministry of Commerce, Government of India vide notification dated 25.7.1991
have recognised the manufacturer exporter of Agriculture and Food Products,
Chemical and Allied Products, Jute Products, Coir Products including Coir Yam
(baled) and Coir Yarn (non-baled). Hand knotted Woollen Carpet and Human
Hair (double drawn) approved under the system for In-Process Quality Control
(IPQC) by Export Inspection Agencies (ELAS) established at Mumbai, Kolkata
Cochin, Delhi & Chennai as an Agency for pre- shipment inspection of export for
which the manufacturer-exporters have been approved by the said EIAs subject
to the following conditions:

(i) that the manufacturer-exporters shall carry out the inspection prior to export
under the technical control of the Director (Inspection & Quality Control).
Export Inspection Council; and
(ii)that the manufacturer-exporters in the performance of their functions under
notification dated 25.7.1991 shall be bound by such directions as the Director
(inspection & Quality Control), Export Inspection Council may give to them in
writing from time to time.
The following instructions have been issued for compliance by the manufacturer
exporters of Agriculture and Food Products, Chemicals & Allied Products, Jute
Products, Coir Products including Coir Yarn (baled) and Coir Yam (non-baled),
Hand knotted Woollen Carpets and Human Hair (double drawn) approved under
the system of 1PQC:
(i) The manufacturer exporters of products referred to above and approved
under In- Process Quality Control (IPQC) having processed their export
products in tune with the quality control drills prescribed under the system of
IPQC and having found export-worthy as a result of inspection and testing
carried out by them may issue certificate of inspection for such products during
the period for which the 1PQC approval has been granted by the EIAs.
(iii)Manufacturing units shall request for a renewal of the IPQC facilities to the
Director (Inspection & Quality Control), Export Inspection Council at least 3
months prior to expiry of the present period of approval.
The manufacturer exporters shall maintain the records which are required to be
maintained under the system.
(iv) The manufacturer-exporters shall ensure that the products certified as
export-worthy conform to the specification recognised by the
Government/Export Inspection Council for the products.
(v) Certificate of export worthiness shall be issued in the proforma prescribed
as per new aligned pre-shipment export documents for issue of inspection
certificate.
(vi) The certificate shall be issued by the official(s) authorised by the
manufacture. exporters and such official(s) shall not be lower than the Head of
the Quality Control Department of the manufacturing units.
(vii) Name(s) designation(s) and specimen signatures of the official(s)
authorised under
(vi) above shall be furnished by the manufacturer exporters to the Customs
Authorities at the port of shipments. The same should also be furnished to the
nearest sub-office of the EIA. Head Office of the EIA and Director (Inspection &
Quality Control), Export Inspection Council.
(viii) Certificate shall be made in quintuplicate in the new standardised format.
Five copies of the certificates will be in different colours and utilised as follows:
(1) Original in green machined turned-For customs
(ii) Duplicate in white-For Head Office, EIA
(iii) Triplicate in white-For Sub-office concerned EIA
(iv) Quadruplicate in white- For Export Department of the Unit
(v) Quintuplicate in white- For the Quality Control Department of the Unit.

(ix) Every certificate issued shall bear a distinct serial number which will never
be repeated and the certificate shall be issued chronologically in the order of
their serial numbers. In a given time only one book shall be issued. All the
certificate shall bear the date of issue.
(x) Certificate shall be neatly typed. There must be no over-typing/erasing
correction, if any must be countersigned by the certifying official of the unit.
(xi) Under Box 4 "Name of the Commodity" the certificate the approved unit
must indicate the title such as Agriculture and Food Products. Chemicals and
Allied Products etc. as the case may be. Complete description of the goods may
be incorporated in Box 5.
(xii) Copies of the certificate issued by the unit during the week shall be
forwarded to the nearest sub-office or Head office of the EIA from where the
manufacturer-exporter were getting the certificate of inspection, on the last
working day of the week along with the following:
(a) copy of the export invoice duly attested and carrying cross reference of the
serial number and date of the certificate to which it relates.
(b) A copy of the export contract indicating the contractual specifications of the
products duly attested.
(c) A demand draft or cheque drawn in favour of the concerned EIA covering
the inspection fee prescribed for the products under IPQC system, for the
consignments certified by the manufacturer-exporters during the last week.
(d) For any change in the FOB value in the certificate of inspection already
issued. The concerned office of the EIA, shall be intimated through a letter
incorporating therein the certificate number, date and details of change made in
the FOB value. In case of upward revision of the value proportionate additional
Inspection fee shall also be paid to the EIA along with the intimation for change.
(e) For the payment of inspection fee, the approved unit may also open a deposit
account with the concerned office of EIA by paying initial lump sum and
remitting further amount periodically depending on the quantum and value of
the exports certified. For this purpose, the unit shall operate a pass-book system
with the concerned EIA.
(xii) If a certificate, after it is issued by the unit is required to be cancelled, the
original copy (customs copy) of such certificate with endorsement of
cancellation shall be forwarded to the concerned sub-office of the EIA.
Duplicate copy with similar endorsement should be sent to the Head Office of
the concerned EIA.
(xiv) Whenever a fresh certificate as required to be issued in lieu of a certificate
issued earlier and subsequently cancelled, following entry must be made in Box
14 "Remarks, if any"
Issued in lieu of Certificate Book No…...Sr. No……..of………..(date)".
(xv) In the event of cancellation of the certificate before its issuance, the unit
must preserve all the 5 copies of the certificate.
(xvi) The certifying authority shall submit a quarterly return duly signed with
name, designation and seal of the company to the Director (I&Q/C), Export
Inspections Council giving following particulars :
(a) Number and date of certificates issued.
(b) Name of the commodity and total FOB value of the consignment certified.
(c) Quantity and FOB value of exports country wise.
(d) A statement of inspection fees paid to the EIA.
(e) Details of complaints received and corrective actions taken during the
quarter.
(xvii) When certificate of inspection is issued by an IPQC approved unit in
favour of another exporter through whom the consignment is being exported
the following conditions shall be complied with:
(a) In the event of any complaint on quality received from the foreign buyer, the
IPQC unit and the exporter through whom the consignment is exported will be
held jointly and severally responsible:
(b) Proper records of the consignments exported through such exporters shall
be maintained by the IPQC units: and
(c) The IPQC units shall continue to be governed by the instructions referred
above.<
Self-Certification
Manufacturers, processing units and exporters qualifying under this system are
intimated by the government as agencies to issue certificates of export
worthiness to their own export consignments. Large manufacturers/Exporters,
export houses/Trading houses are authorised to issue self-certification to them
self on the trust that the exporters will not compromise on the quality aspect of
the products exported by them. This facility is available to chemical and allied
products, Engineering products and marine products. The exporter himself or a
person authorised by him can issue a certificate of inspection. The certificate
has to contain the number and date of EIA under which they are registered as
self-certification units.
Norms Considered for Granting the Self-Certification Facility are:

● Adequate testing ● Maintaining ● Design and

facilities product quality development
● Raw material ● Controls on bought ● Quality Control
testing out components Laboratory
● Process Control ● Meteorological Independent
● After sales service control ● Quality Audit
● Packaging ● House Keeping

Exporters requiring additional information on getting their manufacturing unit

certified as an "Export Worthy Unit" can contact Export Inspection Council of
India. A comparative study of advantages and disadvantages of the above three
schemes is given as under:
Comparative Advantages & Disadvantages Of 3 systems Of Inspection
SI.No Consignment-wise In process Self-
inspection quality control certification

1. Quality Control on each Quality control at A total quality

stage of production is not each stage of control required.
necessary production This is assessed
required. This is by Inter-
assessed by Inter Departmental
Departmental Panel constituted
Panel constituted by EIC.
by Export
Inspection
Council.

2. Certificate Certificate of Certificate of Certificate of

inspection inspection issued inspection issued inspection issued
by issued by the Agency after by the agency on by the authorized
completion of inspection a formal request of the signatory
within the prescribed period. within 48 hours manufacturing
hours of receipt unit. Random
of request for
surveillance of
inspection. Some
the system
consigments at
random at a checked by the
frequency senior officers of
depending upon the agency.
the performance
of the unit
checked by the
agencies.

3. Sealing of packing case No Sealing No Sealing

offered for inspection is done
by the agencies.

4. Exports through Merchant Exporters Exporters

Exporters allowed. through merchant through merchant
Exporters allowed exporters not
subject to allowed.
physical
verification of the
consignment and
sealing by the
agency.

5. Inspection fee is generally Inspection fee is Inspection fee to

0.4% of FOB value. half of the be paid to the
 consignment wise agency is 0.1% of
inspection i.e, FOB value
0.2% of FOB subject to
value. minimum of Rs.
2500 and
maximum Rs.
1,00,000 per unit
per annum.

Post-Shipment Inspection

Post-Shipment Inspection is that examination/Inspection which is carried out

once goods are cleared by the customs authorities in the country of origin. Post-
Shipment Inspection can be carried out until they reach the buyer or in
between. In simple words Post Shipment Inspection can be understood as an
examination that is executed once goods are shipped out for the destination
country. Prime reason behind the buyer's preference for Post Shipment
Inspection is due to manipulation in the inspection if it is carried out in seller's
country.
Benefits of Post Shipment Inspection:
● One of the main benefits of a post-shipment inspection is to eliminate the
risk of disputes in reference with the quantity and quality of goods
received by importers.
● Post-shipment inspections play a key role to stop any fraudulent shipment
activities especially if they are used in combination with pre-shipment
inspections.

Parties of Inspection:
● Inspection by Buyer.
● Inspection by Third Party/Expert/Agent.
● Inspection by Buyer's Representative.
● Inspection by Buying House.
● Self-Inspection by Exporter.
● Inspection by Buyer: It is that Inspection that is carried out by buyer,
this may be in pre shipment stage or post shipment stage. None of the
external agent or party is involved in this Inspection and is more
favorable for buyer and less favorable for exporter.
● Inspection by Third Party/Expert/Agency: In this system of Inspection
an external expert as an agency or Institution conducts the process of
examination as Inspector and certifies the Quality norms and actual
status of the shipment in terms of standards laid down in the industry.
This is done most of time in Pre Shipment stage.
 ● Inspection by Buyer's Representative: This is an Inspection in which
an appointed authority from Buyer conducts the examination process on
behalf of Buyer but is not an external party or agency, nomination of
Inspector is the sole wish of Buyer and may have any of the desired
fashion for Inspection. This type of Inspection is more result oriented in
Pre Shipment stages.
● Inspection by Buying House: In cases when a deal is closed among
three parties and export proceed goes via Buying House such inspection
is more demanded, in this Inspection the party who has under taken all
other important activities for buyer also holds responsibility of
Inspection. This is again is more result oriented and significant before the
shipment leaves the boundaries of country of Origin.
● Self-Inspection by Exporter: The least demanded and less significant
system of Inspection is Inspection by the Exporter as an independent and
unbiased authority for achieving the compliance in Quality and Quality
Control.
International Agencies For Inspection
● There are a number of commodities where compulsory export inspection
is not applicable and exporters can ship them without pre-shipment
inspection. Governments of certain countries prefer to nominate
internationally reputed Inspection Agencies, for carrying out inspection
of all consignments being shipped from India to their country.
● Governments of certain countries get all consignments above a certain
value inspected before shipment. They also nominate internationally
reputed Inspection Agencies.
● To ensure standard quality, some international customers like to have the
consignments, shipped to them from India, inspected by one of the
internationally reputed Agencies. Some of these internationally reputed
Inspection Agencies operating in India are SGS, IEI, OMIC and Lloyds
Register of Shipping.
● When Foreign Governments appoint Inspection Agencies for Compulsory
inspection, they normally pay the inspection charges. In other cases,
charges are paid either by the buyer or the exporter as per their
negotiated terms.

International Business is surrounded by number of risk which include

commercial risk, foreign exchange risk, inflation risk, non-availability of desired
funds and transportation risk. Commercial risk is overcome through
government policies, foreign exchange risk is overcome through forward and
future contract inflation risk through economic policies, desired fund. for
meeting out export import requirement is made available through EXIM Bank
and Commercial banks. As all the risk surrounding International business are
being taken care by some or the other remedy provided by our government in
same way the transportation risk which means loss or mishandling of goods
while they are in transit is also taker care and covered through Marine
Insurance Act. Marine Insurance provides strength to traders/Exporters to
initiate Export Import deals without bearing any risk in mind I against transit
loss. The traders are free to initiate their Export deals as the various transit risk
issues will be taken care by Marine Insurance Policy.
Marine and Cargo insurance is an plan/policy opted in one country is entertain
able in the other nation, some of the writers have explained Insurance as an
agreement (which becomes a contract) between insurer and insured that
undertakes the risk incidental to losses and party insured receives the benefits
and in returns the fixed premium is paid by the insured The insures is the
Insurance company/Business who presumes the accountability when the
loss/damage take place. The insured that obtain the insurance or becomes a
recipient through it or its any clause as applicable, Insurance is an agreement
drafted against the Marine damages/losses financial or virtual caused by a
certain ocean perils (or set of perils) in contemplation to a fixed determined
premium paid or payable periodically or as lump sum. Hull insurance implies to
the full body of the vessel against the likely loss cause by some specific ocean
perils with in a particular voyage or for a fixed period of time. This is a mandate
for business association in international business and especially for such
business that are shipping large amount and valuable goods by vessel.
Within India jurisdiction cargo insurance cover is presented only by the
nationalised insurance companies and few among them are General Insurance
Corporation of India and its subsidiaries in India. These business/companies
operate in the criterion rules and regulation as well as those which are offered
in 'All India Marine Cargo Tariff' with in India. However, as much as marine
insurance provides fair claim to carriers and corporations, it has to be implicit
that marine insurance is also one of the trickiest and strictest indemnity areas
right from the time the idea of marine insurance commenced i.e. from the 17th
century onwards. Therefore it becomes very significant that a vessel's captain
takes due consideration about the prescribed routes so as to avoid a failed
indemnity agreement because of an unexpected loss due to the deviation in the
route. This would bring about not just warning on the part of the captain but
would also reduce the possibility of losing important insurance claims because
of inadvertence and negligence.
A layman definition of the word insurance can be "Protection alongside prospect
loss." Marine indemnity is one more option of the broad term 'insurance' and as
the name proposes is provided to ships and boats and most significantly, the
shipment that is passed in them. In other words coverage aligned with loss and
damage to a vessel and in transportation of cargo loss or damage over sea
routes, land and air is known as Cargo &
Marine Insurance.
Cargo and Marine insurance within Indian boundaries is limited to the following
legislations:
● The insurance Act, 1938; and Insurance Rules, 1939
● Marine insurance Act, 1963
Marine insurance is a safe haven for shipping corporations and carriers because
it helps to decrease the facet of financial loss due to loss of important cargo.
Also, it helps to fetch about to the transporting businesses and to the receiving
parties, the duty, dedication and the straightforwardness of the insurance
companies
Significance of Insurance
All experienced exporters are aware of the risks to their cargo while it is in
transportation. These comprise fire, storm, crash, pilferage, leakage and
explosions. Goods travelling from the country must be insured in opposition to
loss or damage at each juncture of their journey, so that whatever mode of
transport is being used, neither the shipper nor the buyer suffers any loss. In
insurance language the shipment of goods is called an 'adventure' or 'venture' -
terms used long ago when the shipment of goods was far more hazardous than
it is today. Goods should be insured if a person has a financial stake in the
arrival of the goods at their destination. Under the law, a person may purchase
marine insurance in a venture only if he has insurable interest in it. Either the
exporter or his customer will be liable for the goods at any one point in the
journey. The liability laid down in terms of release usually conforms to once the
title of ownership to the goods passes from the exporter to the customer. This is
known as the passing of risk. For example, in an FOB contract the transfer of
ownership is at the point where the goods Passover the ship's rail. In theory the
exporter insures the goods up to that point and the customer takes
responsibility from then on. (In practice the customer normally buys insurance
to cover the whole journey in FOB, FAS and C&F agreements, from the
exporter's store to the final destination). Under a CIF contract the exporter
takes out ocean insurance even through his ownership and responsibility for
loss or damage and when the goods have been placed on vessel. He takes away
cover against the perils customarily covered in his particular trade. He is not
required to do more if not both parties have settled to it. These rules are of
course subject to local usage Whatever allocation of responsibility is settled on,
it must be totally clear and cover any any such risks, the exporter should make
it all-purpose policy that his emergency. To avoid circumstances of sale make
him responsible for providing marine insurance- even in FOB pacts. If this is not
likely due to local traditions, an exporter can purchase special contingency
insurance which will make up any scarcity in claims compensated by the
customer's insurance. It should be noted that marine insurance is a misleading
term and can be extended to cover transportation over land or on inland
waterways.
Need for Cargo Insurance
● To minimise the possibilities of financial loss due to accident or other
reasons causing damages to the consignment in Export/Import.
● Contractual Requirement (may not be applicable) however if it becomes a
legal obligation then shipper must get the Insurance done at his end.
● Coverage for limited carrier liability, since transporters do not cover the
common incidents which are responsible for loss and damages, even if a
transporter/carrier is responsible for compensation in a limited liability
even then its recommended to get an Insurance for a shipment.
 ● Insurance for a shipment gives more control over insuring terms to both
the parties on International business, the additional advantage can be
utilised in business expansion and exporting more shipments in less time
● In case of posting a bond for shipment release followed by general
average will speed up clearance of a shipment.

Types of Losses in International Transit

Losses in International transit are subject to mode and distance to be travelled
by the shipment, however in any case the losses to the product shipped are not
acceptable and may cause over and above financial loss. Losses in international
trade can be classified as follows on the basis of the extent of the injury
occurred to the product:
1. Total Loss (This is of two type viz. Actual total Loss or Constructive Total
Loss). 2. Partial Loss (This is also of two type viz. General Average Loss and
Particular Average Loss).
Explanation of "Average" Term: As a matter of fact the protection offered by the
Marine Insurance Policy is defined by its "Average" term. In Insurance the word
"Average" has its specific meaning and applicability over the insurance cover
granted to the insured and means "Partial Loss", further the "Partial Loss"
implies the total loss of the standard part that is been insured in the policy as
shipment. Particular Average on the other hand is referred as loss to the part of
the cargo as portion of the object insured. While General Average is that
loss/damage that involves all cargo interest on the vessel including the ship,
goods or freight which is undertook as common safety of the adventure during
the peril and or the extraordinary payments with the similar object. The scheme
of general average accountability is to divide the loss incurred to some specific
individuals indulged in the voyage in order to assign the fair share to all the
interested parties in a voyage this can be understood with a hypothetical
situation where a ship faces adverse weather condition during journey and
ultimately captain of the ship (to save the remaining unspecified parts of the
ship as cargo) throws few shipments then this situation of calculation of loss
and claim of loss will be based on the "General Average" and the value lost
goods in this case is contributed to the proportionate to all parties having stake
in the voyage including the cargo owners and ship owners and each of them is
suppose to pay/contribute to compensate the loss of the specific party even if
his own shipment may not underwent in loss. Accidents in transit of cargoes
may result in general average and particular average losses.
Perils
Perils from insurance perspective can be explained as an event, cause or
incident thereof that leads to damage or loss to the shipment meant for
international cargo, against the perils an insurance cover can be obtained to
hedge the risk associated with the such financial loss and loss to the goodwill of
the shipper when injured shipment arrives at the Importer's doorstep. Perils can
be classified into following four groups:
1. Marine Perils: This can be in the form of act of God or the natural calamity,
this falls in under the cover of insurance provided the best possible practices
were been followed to avoid any such circumstances which had the potential to
attract the loss or damage in the shipment.
2. Extraneous Perils: This includes any such fault during loading or unloading
of shipment that has not been purposely performed which could result into loss
or damage, even any kind of leakage in the cargo that has occurred even after
the sufficient protective packaging.
3. War Perils: Civil war, rebellion, revolt, revolution or any kind of political or
democratic misbalance which gives rise to the fight situation in a country.
4. Strike Perils: Any: Lock out situation or strike that gives rise to the situation
of damage or loss to the shipment.
Procedure to Claim Losses
Under the Marine and Cargo Insurance in International Trade when loss arises
following step wise sequence need to be followed:
1. Intimation to Insurance Company: Immediate notice should be delivered to
the insurer or its agent as applicable in the Insurance Policy cover, this first
information to the insurance company is in the form which explains the details
of losses occurred.
2. The policy holder or the insured party should confirm that all the rights
against the transporter, delivery service or carrier and third parties are exactly
conserved and executed.
3. In case if the outward symbols of loss or damage are visible on the packs in
shipment then the insured or its agent must call for a detailed survey by the
vessel surveyors for such injured packages, the insured should also lodge the
appropriate mandatory claim on the carrier/shipping company for loss or
damage thus occurred.
4. In case when the ship survey is time barred then the party insured or its
agent must call off the option of survey by the insurance company for the
packages found in state of loss and this should be exercised before the delivery
comes into effect Another situation similar to this one may be as if the packages
found undamaged when received and when packets are opened there are losses
or damage found, in this situation the insured party or its agent must inform the
insurance company immediately and ensure the survey executed the same
reference, till the inspection for loss is not executed the insurance company till
then the insured party should retain the goods as well as its packaging material
as it was for the inspector of the insurance for the appropriate assessment of
the damage and amount claimable in insurance cover.
5. If the packets/bundles are found missing the insured party must immediately
lodge the mandatory claim with the insurance company so as to claim the full
value of the missing packets, the receipt of filed mandatory claim under this
situation must be obtained by the insured party from the agent or the insurance
company.
6. As per the Carriage of Goods by Sea Act 1925 any such loss that is sought
under the claim of insurance cover must be reported with in a time limit of
maximum one year as a law suits, one year starts from the date of discharge of
goods from the customs of the jurisdiction of Importing country.
Documentation required for the Claim under Insurance: When there is a claim
procedure to be opted for the loss and damage the following documents need to
be accompanied by the insured party or its agent:
1. Original Insurance Policy/Insurance Certificate endorsed by the policy holder
or the insured party.
2. Bill of lading or the Airway bill (as applicable) or the receipt from the
transporter as acknowledgement of goods, must be presented (all copies as
applicable) for claims, in case of shipment through ICD or CFS the copy of
receipt by the railways (where the container as LCL or FCL was loaded).
3. Copy of Invoice.
4. Letter of Subrogation stamped and duly signed.
5. Packing List or Weight List.
6. Insurance Survey report from the Insurance surveyor or other such document
as report that claims the extent of loss that will be remitted by the insurance
company.
7. Discrepancy Certificate or the Joint Ship Survey Certificate (issued by the
shipping company).
8. Port Authority Landing remarks/notes.
9. Casual Report about the vessel (in case if the ship is found as missing or lost).
10. Captain's Protest or copy of the removal of shipment from Log Book of the
vessel if the ship under goes through the heavy/bad weather or other causalities
during the journey.
11. Short Landing Certificate issued by the Port Authorities or the Shipping
Company if as loss there is short landing of packets/bags.
12. Missing Certificate from the Port Authorities if the shipment lands at the
port and
found as missing.
13. G.A. Deposit Receipt and the Bank Counter Guarantees if the General
Average claim
is made for refunds of GA Deposit.
14. Triplicate copy of Bill of Entry (in case the claims are filed in India).
15. Copies of the Letter filing the claims on the shipping company or against the
Port Authorities.
16. Any other document as asked by the insurance company to proceed with the
claim process.
Marine Insurance Contract
Marine Insurance contract is an understanding by which the insurance company
(insurer) agrees to indemnify the owner (insured) of a vessel or cargo against
risks which a incidental to marine adventure. Such contracts are based on the
following principals:
● Principal of utmost good faith ie. the insured must disclose to the insurer
all the material facts or circumstance which are known to him or which
must to be known to him in the ordinary course of business.
● Principal of insurable interest i.e. no individual can enter into applicable
contract of insurance, unless he had insurable interest in the object or
the life insured. Insurable interest is implicit as an interest in the
preservation of a thing or continuance of life, as recognised by law. Thus,
one can have an insurable interest only when ore would stand to benefit
financially by the persistence of the life or entity insured, or else financial
loss would result. Thus, a person can take a policy on his ship, an owner
of the goods can take policy on consignment and a person entitled to
receive freight can take policy on freight. All such persons have insurable
interest to the subject manner. Without insurable interest such contracts
are simply wagering agreements, which are not valid indentures.
● Principal of indemnity i.e. the contracts of insurance only underwrite
(make good) a loss ensuing from risk sheltered under the policy. However,
the cargo owners are usually allowed sensible anticipated earnings. In
other words, we can say that the marine insurance policy provides a
commercial indemnity somewhat than indemnity in a firm legal sense.
Kinds of Marine Insurance Policies
1- Voyage Policy
2- Time Policy
3- Valued Policy
4- Unvalued Policy
5- Floating Policy
6- Block Policy
7- Wager Policy
8- Composite Policy
9. Fleet Policy
10- Port Policy

1. Voyage Policy
It covers the risk from the port of departure up to the port of destination.The
policy is over when the ship arrives at the port of destination. This type of
policy is purchased generally for cargo. The risk coverage begins when the ship
departs from the port of departure.
2. Time Policy

This policy is issued for a particular period. All the marine perils during that
time are insured. This type of policy is suitable for full insurance. The ship is
insured for an unchanging period irrespective of journeys. The policy is usually
issued for one year. Time policies may sometimes be issued for more than one
year or they may be extended beyond a year to enable a ship to complete a
voyage. In India, a time policy is not issued for more than a year.

3. Valued Policy

Under this policy, the worth of the policy is determined at the time of contract.
The value is written on the face of the policy. In case of loss, the decided
amount will be compensated. There is no dispute later on for determining the
value of reimbursement. The value of goods comprises cost, freight, insurance
charges, some margin of profit, and other incidental expenses. The ships are
insured in this manner.

4. Unvalued Policy

When the value of the insurance policy is not decided at the time of taking up a
policy, it is known as an unvalued policy. The amount of loss is ascertained when
a loss occurs. At the time of loss or damage, the value of the subject matter is
determined. In finding out the value of goods, freight, insurance charges, and
some margin of profit is permissible to the policy in common use.

5. Floating Policy

When a person ships goods frequently in a particular geographical region, he

will have to purchase a marine policy every time. It includes a lot of time and
official procedure. The person purchases a policy for a lump sum amount
without mentioning the value of goods and the name of the ship etc.

6. Block Policy

Sometimes a policy is issued to cover both land and sea risks. If the shipment
is sent by rail or by truck to the departure, then it will involve risk on land also.
One single policy can be issued to cover risks from the instance of dispatch to
the point of final arrival. This policy is called a Block Policy.

7. Wager Policy

This is a policy held by a person who does not have any insurable interest in the
matter insured. The person simply bets or gambles with the underwriter. The
policy is not enforced by law. But still, underwriters claim under this policy.
The wager policy is also called 'Honour Policy' or 'Policies Proof of
Interest' (P.P.I.).

8. Composite Policy

A policy may be undertaken by more than one underwriter. The obligation of

each underwriter is distinctly fixed. This is called a composite policy.
9. Fleet Policy

A policy may be taken up for one ship or for the whole fleet. If it is taken for
each ship, it is called a single vessel policy. When a company acquires one policy
for all its vessels, it is called a fleet policy. The insured has an advantage of
covering even old ships at an average rate of premium. This policy is generally
a time policy.

10. Port Policy

It covers the risks when a ship is anchored at a port.

Other basis of Insurance that can be availed by Exporters & Importers

The extent of possible insurance coverage that may be purchased varies; there
is a wide variety of standard types of coverage. Three important ones are Free
of particular average, with particular average, and All Risks.

1. FPA (Free of particular average)

2. WPA (With particular average)
3. ALL RISKS

1- FPA (Free of particular average)

This is the minimum coverage in general use. It covers losses due to a ship or
aircraft being totally lost. Partial loss is not covered, except to a limited
extent and in particular circumstances. Which partial losses are covered
and under what conditions vary according to national practice.

2- WPA (With particular average)

This policy provides cover against the goods being damaged in transit, but not
because the ship was in danger. Partial loss is normally covered with a
percentage franchise. That is, losses above a stated percentage of the value of
the insured cargo are paid for, in practical terms. The additional coverage one
gets with WPA terms, compared with FPA, is security against damage from sea
water due to 'heavy weather'.

3- All Risks

Insure against most risks except risk of force majeure (war) unless the
exporter has specifically asked for this to be included.

Additional specific risks may be covered by additional insurance in the FPA and
WPA articles. These include not only marine perils but such risks as harm from
hooks, oil, rain, bilge or fresh water, theft, shortage or non-delivery, sweat,
contact with other cargo, leakage or breakage.