Thursday, February 5, 2009

3 economist... :):):)

Three economists are out deer hunting one day when they see a huge buck in the clearing in front of them. The first economist takes aim with his rifle and fires. The bullet goes flying by the deer, about 20 feet in front of it. The second economist decides to give it a try. He takes aim and shoots. The bullet goes flying by the deer, this time about 20 feet behind the deer. At this point, the third economist starts jumping up and down, overcome with joy, yelling: WE GOT IT!! WE GOT IT!!

note:- the picture shown does not meant to offend any one.


The ICC (International Chambers Of Commerce) in the UCPDC (Uniform Custom Practices for Documentary Credit) defines LC (Letter of Credit) as:
“An arrangement, however named or described, whereby bank (the Issuing Bank) acting at the request and on the instructions of the customer (the applicant) or on its own behalf:
a) is to make a payment to or to the order of a third party(beneficiary) or is to accept bills of exchange(drafts) drawn by the beneficiary), or,
b) Authorizes another bank to effect such payments or to aceept and pay such bills of exchange(drafts), or,
c) Authorizes another bank to negotiate against stipulated documents provided that the terms are compiled with.”
Or in simple words, LC can be characterized as “an arrangement of Making Payment against Documents”. Banks in India normally opens Import LC under following circumstances:
Ø When a resident in India is importing goods into India.
Ø When a resident merchant trader is purchasing goods from one country, for sale to another country, for purpose of merchandising trade.
Ø When an Indian exporter who is executing a contract abroad requires importing goods from a third country to the country where he is executing the contract.
The inter-bank communication and transaction in LCs take place through SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) network. SWIFT is industry owned cooperative supplying secure messaging services and interface software to over 7,000 financial institutions in 196 countries.
SWIFT messages are preset and referred to by category numbers called MT numbers. For example, MT300’s only deal with Forex transactions, MT800’s deal with Traveler’s cheques, etc. Each type of message in each category is preset as well. For instance, there are 89 different messages available under category 0f MT500.

How LC is a “Source of Earning for Bank”
Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another.
From the bank's point of view, the LC they have issued can be called upon at any time (subject to the relevant terms and conditions), and the bank then looks to reclaim this from the applicant.
Banks earn commission from the applicant for making payment on his behalf to his exporter. Commission charged by Bank, on opening of LC or at the amendment is to be realized Upfront and no refund is being allowed. Commission charges concerned with LC(Bank normally) are given as follows:
1. Commitment charges At the time of opening of LC, commission of 0.15% is charged for every quarter and part thereof

2. Usance charges
Name of the Item
Rate of interest
For Bill Upto 10Days sight
For Bills upto 3months
For Bills over 3months
0.30% for first 3months+0.10% per month in excess of 3 months sight



'Post-shipment Credit' means any loan or advance granted or any other
credit provided by an institution to an exporter of goods from India from the date of extending credit after shipment of goods to the date of realization of export proceeds. It also includes any loan or advance granted to an exporter, in consideration of, or on the security of, any Duty Drawback or any receivables from Government Of India. PS Finance can be classified as under:
a. Negotiation/Payment/Acceptance of export documents under LC.
b. Purchase/Discount of export documents under confirmed orders/export contracts etc.
c. Advances against export bills sent on collection basis.
d. Advances against exports on consignment basis.
e. Advances against undrawn balances on exports.
f. Advances against receivables from Government of India.
g. Advances against retention money relating to exports.
h. Advances against approved deemed exports.

PS Credit is generally availed by exporters to get immediate payment against the goods (or services) shipped by them abroad. For availing this facility from Bank, documents are to be submitted within 21 days

How PS is a “Source of Earning for Bank”

Post shipment finance is meant to finance export receivables. In Post-Shipment sought of credit, Bank charges nearly Rs.20000 as commission per sanction.
The rate of interest charged for this facility by the same is as follows:

Name of the Item
Rate of interest
For Bill Upto 10Days sight
For Bills up to 3months
For Bills over 3months
0.30% for first 3months+0.10% per month in excess of 3 months sight

The interest scheme is given as under:

Name of the Item
Rate of Interest
On demand bills for transit period (as specified by FEDAI)
not exceeding 0.75% over LIBOR
(LIBOR is 5.35%)
2.Against usance bills (credit for total period comprising usance period of export bills, transit period as specified by FEDAI +grace period wherever applicable) up to 6 months from the date of shipment
not exceeding 0.75% over LIBOR(that is, not more than 6.10%)
3.Export bills (demand or usance) realized after due date but up to date of crystallization
0.75% + 2.0%points (that is, 8.10%)
Thus, banks earn mainly through commission and rate of interest charged under Post-Shipment Credit granting sort of transaction. Foreign Currency earned may be kept as deposit with the bank, or, it may also use it for trade purposes, so, as to earn exchange profit

Pre-Shipment/Packing Credit(PC)

Pre-Shipment/Packing Credit(PC)

PCFC is a scheme which provides credit to exporter in domestic/foreign currency in order to facilitate the purchase of raw material/components that are required to fulfill the export order. Or, in brief, it is a Working Capital (short-term) finance extended to the exporters, in anticipation of his exporting the goods. The exporter can procure the raw materials/components either from international or from domestic market.
This facility can be availed by exporter in one convertible foreign currency in respect of an export order invoiced in another convertible foreign currency. The risk and cost involved in such cross currency transaction is that of exporter.

Pre-Shipment Credit can be availed in the form of:
a. Packing Credit in Indian Rupees
b. Packing Credit in Foreign Currency
c. Advance against incentives receivable from Government covered by ECGC (Export Credit Guarantee Corporation) Guarantee.
d. Advance against Cheques/Drafts received as Advance Payment.

Bank provides all the forms of PC. It strictly follows the instructions and rules and regulations governing the following:
1. Exchange Control Regulations
2. Trade Control Regulations
3. RBI’s Interest rate directives and other operational guidelines
4. ECGC policies and guarantees
5. Rules of FEDAI(Foreign Exchange Dealers Association of India)

How PC is a “Source of Earning for Bank”
PC is being introduced with the objective of making credit available to exporter at internationally competitive rates.
Bank charges Rs. 20000 per sanction (that is, it charges this amount on every PCFC request by an exporter).
The rate of interest charged for this facility, by Bank, is linked to LIBOR (that is, rate of interest charged to exporter should not exceed 0.75% over 6months on LIBOR, excluding withholding tax.). The interest scheme, followed by Banks, is given as under:

Name of the Item
Rate of Interest
Up to 180 days
not exceeding 0.75% over LIBOR
Beyond 180 days and up to 360
not exceeding 0.75% over LIBOR+2%LIBOR (London International Bank Offer Rate) is presently 5.35%