Sourcing from India: Banking, payments & export documentation

This article is an excerpt from Sourcing From: India, a series of reports that provides buyers sourcing information from alternative manufacturing hubs in Asia. To read the entire articles, click on the following links: Banking & finance, Paying for your purchase and Export documentation.

The Sourcing From series is produced by the Hinrich Foundation, a development organization that aims to promote sustainable global trade by, among others, helping create jobs in emerging Asia. It also produces industry-specific sourcing reports through Online Developing Country Sourcing.

BANKING & FINANCE

Although India's banking system is considered elaborate and complicated, the sector has been resilient over the past few years while facing high domestic inflation, rupee depreciation and fiscal uncertainty in Europe and the US.

Banking structure

The Reserve Bank of India (RBI) acts as the central banking institution. It has the sole authority to issue bank notes. It also administers exchange control regulations and the government's monetary policy, supervises the activities of all local and foreign banks, and regulates money supply and credit. RBI has 19 regional offices and nine sub-offices.

The banking system in India has three tiers, namely commercial banks, cooperative and special purpose rural banks, and regional rural banks. Most large banks and financial institutions are in the public sector. The public sector banks dominate the banking industry, cornering over 70 percent of the market. Private banks account for 17 percent and foreign banks 13 percent.

Commercial banks

Currently, there are approximately 80 scheduled domestic and foreign commercial banks in India, with a total of 109,811 offices. Commercial banks provide short-term loans for fixed asset investment. They also provide capital market advisor services through merchant banking subsidiaries, foreign exchange services such as swaps and hedges, investment consultancy, factoring through subsidiaries, and personal banking services such as credit cards.

Foreign banks

There are currently 43 foreign banks with 334 branches operating in India. There are also 46 foreign banks with representative offices.

Foreign banks offer a full range of commercial financing activities and operate under the 1949 Banking Companies Regulation Act. They need permission to open new branches or offices and must comply with RBI lending rates.

Exim Bank

The most important financial institution for Indian exports is the Export-Import Bank of India (Exim Bank). Established in 1981, Exim Bank is the principal coordinator for institutions engaged in financing import and export trade.

Exim Bank's job is to provide facilities to exporters all over the country and coordinate with commercial banks and other lending institutions on export-related loans. Its nonfunded schemes mainly cover assistance in the form of bid bonds, advance payment guarantees and retention money guarantees for raising money abroad. The guarantees are given in foreign currency on behalf of Indian exporters or contractors in favor of the overseas importers, employers and/or banks. The Exim Bank also provides merchant banking services to assist exporters in assessing global credit sources.

Other financial institutions

The Industrial Development Bank of India coordinates and supports the operations of banks and other financial institutions engaged in industrial development. The Industrial Finance Corporation of India provides medium and long-term financing to companies and cooperatives engaged in a variety of industrial and manufacturing fields. It also promotes the industrialization of less developed areas and sponsors training in development banking.

Major financial assistance is offered to industrial enterprises by the Industrial Credit and Investment Corporation of India in the form of rupee or foreign currency loans or equity participation. This institution also offers financing for export development, technology and other ventures. Other financial institutions include the National Bank of Agriculture and Rural Development, National Housing Bank and the Industrial Reconstruction Bank.

Foreign exchange policy

The Foreign Exchange Department of the RBI is in charge of laying down the policies and procedures under the Foreign Exchange Management Act of 1999 (FEMA). Under FEMA, foreign exchange transactions are separated into two categories: current account and capital account transactions. The central office is located in Mumbai with 17 regional offices spread across the country.

PAYING FOR YOUR PURCHASE

International buyers conducting business in India can use a number of methods for payment including letters of credit (L/Cs), wire transfers and drafts.

Letter of credit

A documentary letter of credit (L/C) is an internationally accepted and commonly used method of export payment. In Vietnam, as in other parts of the world, an L/C is the most acceptable method of payment, offering protection to both buyer and seller. By using an L/C, not only do suppliers get their money but buyers get the title to the goods.

An L/C can take several forms. An irrevocable letter of credit is commonly used and can be amended or canceled only with the agreement of all parties concerned. It is important to specify that the credit is "irrevocable", otherwise it will be deemed revocable. It is generally accepted that the irrevocability of the credit starts when the credit is actually received by the supplier.

Indian exporters prefer the irrevocable L/C as it is normally withdrawn only when the exporter does not meet the terms and conditions of shipment, leading to the rejection of documents by the bank. This type of L/C ensures payment to the exporter.

Indian companies will often resist using a confirmed L/C due to the additional requirements and costs required by local and international banks. In the past, companies have often requested deferred payment L/Cs, with extensions of up to 360 or even 540 days. Most lenders have stopped this practice. Currently, sight L/Cs and L/Cs with 60, 90, or 120 days are the most commonly used.

Documents against payment

Documents against payment (D/P) are another popular method of export payment. Under D/P terms, the supplier releases the documents relating to the transfer of title only after payment. There are some risks to the supplier, as he will have to produce and ship the order before tendering the required documents for payment. He loses if the buyer does not accept the documents.

Documents against acceptance

Under the D/A method, the supplier agrees to extend some credit terms to the buyer, with payment to be made within a stipulated number of days after acceptance of the documents or another date stipulated in the draft (such as the number of days after the bill of lading date). Payment can extend from 30 to 180 days after acceptance of the documents. The D/A method gives the buyer the advantage of not having to pay until after the documents are accepted. The supplier, however, bears some risk as he will not get paid until after the buyer has taken possession of the goods.

It should be noted that under both D/P and D/A methods, it is not the bank’s responsibility to inspect the documents, so the importer and exporter should do the inspection.

Cash

Cash sales are uncommon because someone paying cash is looking for a good deal. A supplier may require cash as form of payment if the shipment is made to very specific guidelines, rendering the goods unsellable other than to the company that ordered them. Cash also might be required if the exporter is doubtful of the buyer’s credit standing, if there is only a random sale, or if the buyer requires the goods urgently. When cash is demanded, remittances may be received by means of a draft, mail or telegraphic transfer, or international money order.

Payment by cash, however, involves a greater financial burden and risk to buyers. Buyers run the risk of not getting the goods they ordered on time or they may get goods that don’t meet their specifications. Choosing your supplier carefully is the key to avoiding such problems. If your Indian suppliers require cash payment upon signing the contract and you’re not sure whether they can deliver what’s promised, insist on using another form of payment.

Cash payments are rare, but permissible if no interest is involved in the transaction. However, if payment of interest to the foreign buyer is necessary, prior permission must be obtained from the RBI.

Consignment basis

It is a standard trade practice for certain products to be exported on consignment basis for sale. Consignment allows the consignee (the buyer) to pay on a specified date. Shipping documents are sent to the overseas bank with instructions for the consignee to pay on a specified date. However, exchange control laws of most Asian countries require payments to be received within six months of the date of the shipment. This method is usually extended to buyers with good credit standing.

Sales on open account

This is generally adopted in an intercompany relationship or when the importer and exporter already have long and favorable trade relationship. Payment is made by periodic remittances. No procedure for documentation is needed as the exporter delivers the goods, prepares the invoice for the buyer, and awaits payment.

EXPORT DOCUMENTATION

India's bureaucratic procedures are known for being complex, cumbersome and time-consuming. Missing or incomplete papers, inconsistencies and even misspellings may hinder export clearance. Without the accompanying certificates in proper order, goods will not leave India and may result in delays and consequently increase the cost of your transactions.

Although obtaining the necessary documents and preparing them correctly and consistently is the responsibility of the supplier, it is in buyer's best interest to have an accurate knowledge of the export process and the required documentation.

Export registration

In the past, exporters were required to obtain a 10-digit Importer Exporter Code (IEC) from the RBI in order to engage in export operations. Today, the Directorate General of Foreign Trade (DGFT), under the Ministry of Commerce and Industry, is in charge of granting the IEC code which is mandatory in order to import or export in India.

In order to register an IEC number with the Indian government, an ANF 2A application for IEC code must be filled out and submitted along with necessary documents to the nearest Regional Authority of the DGFT.

It is also possible to file for the IEC number online at the Directorate General of Foreign Trade’s website.

Export inspections

The Export Inspection Council of India, established by the Central Government and the Ministry of Commerce and Industry, handles quality control, pre-shipment inspection and other trade-support processes.

The Export Inspection Council of India has five Export Inspection Agencies (EIAs) located in Chennai, Delhi, Kochi, Kolkata and Mumbai. These agencies were established with the purpose of implementing the various measures and policies formulated by the Export Inspection Council of India.

Services include certification of quality of export commodities through installation of quality assurance systems in exporting units and consignment wise inspection, certification of quality of food items for export through installation of food safety management systems in the food processing units, and issuance of Certificates of Origin to exporters under various preferential tariff schemes for export procedures.

Commercial invoice

This is the basic and most important document in international trade. Apart from being the seller's bill for the merchandise, it contains comprehensive information about the shipper, importer, price, origin, etc. necessary for the preparation of other documents. While this document is fundamental, some countries may require additional invoices.

Certificate of Origin

A Certificate of Origin ensures that goods actually originate from the country from which they have been purchased and have not been re-shopped via a third country.

The GSP Certificate of Origin-Form A is the standard form for exports and is available from Export Promotion Councils in the major cites of India. This form requires the exporter to detail such items as the means of transport route, description of products, number of boxes and certificate of origin.

Certificate of Value

This form, required by most countries, is signed by the exporter to confirm the invoice value shown in the commercial invoice is correct.

Certificate of Inspection

Some contracts and countries might require an inspection certificate to be issued by an authorized agency in India, working under contract for the foreign buyer. This may be in addition to pre-inspection certificates required by the Indian government.

Marine Insurance Policy

The Marine Insurance Policy covers all modes of transport, whether sea, air or land. Types of marine insurance policies include:

• Cargo insurance - includes the cargo or goods contained in the ship and the personal belongings of crew and passengers
• Freight insurance - provides protection against the loss of freight
• Hull insurance - covers the infrastructure of the vessel and its equipment
• Liability insurance - protects on account of liability to a third party caused by collision of the ship and other similar hazards

Packing List

The packing list is the consolidated statement indicating the number of individual cases or packs in a given cargo. The list usually details the weight of the shipments and who packed it, at what date, as well as the quantity of items being shipped.

Bill of Lading

This is the most popular document and must conform strictly with the conditions and terms of the letter of credit. There are many types of bills of lading (B/L) to cover various methods of transport, including transshipment B/L, container B/L, through B/L or multimodal B/L. The buyer should recommend the best possible means to transport the order from India to a designated discharge point.

Combined Transport Document

A combined transport document is issued when the merchandise is transshipped using more than one method of transport. It is an alternative document to the traditional B/L. With the global increase in container shipments, combined transport B/Ls are very common and many banks do not require special authorization to be granted in your L/C for their use.

Air waybill

Though less widely used that sea transport, airfreight is a growing export medium. The B/L equivalent for airfreight is an air waybill. It is not a document of title and is non-negotiable, but is a receipt issued by the shipper carrying goods by air.

Post parcel receipt

Very similar in concept to the air waybill, the post parcel receipt is a receipt of goods exported, although the quantity shipped is usually small in comparison. Unless the export items are under L/C it is recommend that the items are dispatched to the buyer’s bank.

Bill of exchange

Once the goods have been shipped, the letter of credit can be released from the issuing bank to the negotiating bank, through a foreign exchange bank or a foreign bank branch. The exporter issues a bill of exchange and submits this to the foreign bank along with the shipping documents, L/C and any other documents required.