Foreign bill discounting & export finance

Export finance has two halves

Exporters need money at two distinct points, and the instruments are different at each.

Before shipment, you need working capital to buy raw material, manufacture and pack against a confirmed order or letter of credit. That is pre-shipment finance, commonly called packing credit, available in rupees or as a foreign currency facility. It is extended against evidence of an export order and is liquidated from the export proceeds.

After shipment, the goods have gone but the buyer pays in sixty or ninety days. That is post-shipment finance, and foreign bill discounting is its main form. The bank buys, negotiates or discounts your export bill and credits you now, recovering when the overseas buyer pays.

Both are short-term, self-liquidating facilities tied to a specific transaction rather than a general limit, which is what distinguishes them from ordinary working capital finance.

Under an LC, and without one

The single biggest determinant of how cheaply an export bill is financed is whether a letter of credit backs it.

With an LC, the issuing bank has undertaken to pay against documents that comply with the credit terms. Your bank is therefore taking exposure to a bank rather than to your buyer, which is a fundamentally better risk and is priced as such. The critical discipline is document compliance: under UCP 600 the banks deal in documents, not in goods, and a discrepancy — a date out of sequence, a description that does not match the credit word for word, a missing endorsement — entitles the issuing bank to refuse. Discrepancies are the commonest cause of export payment delay, and almost all of them are avoidable with a careful read of the credit before shipment rather than after.

Without an LC, on documents against acceptance or documents against payment, your bank is relying on the buyer and on you. Pricing reflects that, and ECGC cover is frequently required. For a new overseas relationship, insisting on an LC for the first few shipments is ordinary commercial prudence rather than distrust.

Regulatory mechanics an exporter has to get right

• Realisation and repatriation. FEMA prescribes a period within which export proceeds must be realised and brought into India. Bills outstanding beyond it are treated as overdue and your bank is obliged to follow up and report. Extensions are possible but must be sought, not assumed.
• EDPMS. Export transactions are tracked through the Export Data Processing and Monitoring System, which matches shipping bills against realisations. Unmatched entries surface as outstanding against your IEC and can obstruct future transactions until cleared.
• Electronic BRC. The bank issues an electronic bank realisation certificate confirming receipt of proceeds. It is what you need to claim most export incentives, so make sure it is generated rather than assuming it was.
• Crystallisation. Where an export bill remains unpaid beyond a stated period, the bank crystallises the foreign currency liability into rupees at a prevailing rate, and you carry the exchange difference. Understand your bank's crystallisation policy before you need it.

Managing the currency, not just the credit

An exporter discounting a ninety-day dollar bill has two exposures, and most focus only on the first. The credit exposure is whether the buyer pays. The currency exposure is what the rupee does in the meantime. On thin export margins, an adverse move of a few percent can consume the entire profit on a shipment.

Forward contracts and other hedging instruments are available through your authorised dealer bank for this purpose. Whether to hedge, and how much, is a commercial judgement about your margin and your tolerance, not a financing decision — but it should be made deliberately at the time of the order rather than left to resolve itself.

Foreign currency denominated pre-shipment and post-shipment facilities provide a partial natural hedge, since the borrowing and the receivable are in the same currency. They also price against an international benchmark rather than a domestic one, so the comparison against a rupee facility should be made on the all-in cost after any hedging, not on the headline rate.

How Rytvae helps

We work with exporters around Bengaluru to structure pre- and post-shipment limits against the actual order book, prepare the file, and arrange facilities through our banking partners. For domestic receivables see invoice and bill discounting and factoring; for the instrument on the buyer's side see LC discounting.

Frequently asked questions