Literature Review (Part1)
Introduction to Export Finance
Export constitute the edifice of citadel of a sound economy more particularly for a developing nation like India, which has been suffering from a persistent balance of payment (BOP) problem from more than a decade, reaching to a crisis proportion in June 1991. Therefore, thrust towards development of Indian economy has been promotion of exports.
One of the major contributory factors for promotion of export trade is the availability of “Special Finance” both at pre and post-shipment stages. An exporter has not only to procure the raw materials either indigenous or imported for processing the same in finished goods and boarding them ...view middle of the document...
Export Bank of India and Export Credit Guarantee Corporation of India (ECGC) Limited are the other two institutions created in this regard.
Despite the existence of such massive network, the problems continue. Complaints are often heard from exporters, regarding rigidity of banks’ credit mechanism along with delays in decision making process. Suggestions come forth towards relaxation of norms for financing along with need for introduction of innovative services. Similarly, bankers opine in favor of closer coordination with term lending institutions and better response from ECGC towards settlement of claims. In the above backdrop, the present study was undertaken to look into the various aspects of export financing in India with particular reference to the role of commercial banks.
Why is there a need for Export Finance?
Credit and finance is the life blood of business whether domestic or international. More so in the case of export transactions on account of the emergence and prevalence of ingenious non-price competitive techniques encountered by exporters in various countries to enlarge their share of world markets (Ram and Garg, 2013).
Exporters require financing resources essential for two reasons: for the working capital through trade credit, to run their export business, to manufacture or acquire goods to fill an order, and to reduce their cash cycle, anticipating revenues after shipping goods, as firms often sell on credit and have to wait to obtain payments at maturity (Kawas 1997).
Financing methods are determined to a large extent by the degree of control the exporter desires to retain over the merchandise, as well at the time limit that has been placed upon the extension of credit (Gerald et al, 2006). Export financing resources relate to specific resources available to exporting firms and allowing them to be in an effective competition in foreign markets.
Introduction of Export Credit Scheme by RBI
The RBI first introduced the scheme of Export Financing in 1967. The scheme is intended to make short-term working capital finance available to exporters at internationally comparable interest rates. Under the earlier scheme in force upto June 30, 2010, RBI fixed only the ceiling rate of interest for export credit while banks were free to decide the rates of interest within the ceiling rates keeping in view the Benchmark Prime Lending Rate (BPLR) and spread guidelines and taking into account track record of the borrowers and the risk perception.
In order to enhance transparency in banks' pricing of their loan products, banks were advised to fix their BPLR after taking into account (i) actual cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory requirement of provisioning / capital charge and profit margin.
However, the BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could...