Disclaimer: This material has been prepared in the individual capacity of the author and so might be different from the organisation's viewpoint. While due care has been taken in preparing this note, the author or his organisation can not be held responsible for the consequences of any decision made on the basis of information contained herein.
Consider the following situation:
You, as an auto parts exporter want to sell your product to an overseas buyer based in the United States. The overseas buyer is satisfied with the quality and specs of your products and enquires about the products’ prices. However, you are not the only auto parts producer competing for his business – there are several others, especially those from the other Asian countries, who offer tough competition to you. Your product quality being the same, what can you compete on? Pricing !
Export pricing can be crucially affected by factors such as export financing and the behavior of the Indian Rupee Vis a Vis the US Dollar (and in cases where the export is to Europe, the behaviour of EURO to US Dollar).
This section aims at giving you an idea of the options available to an exporter for availing of export financing and how you need to exercise good judgment relating to currency values, both of which are essential for you to arrive at realizations which will influence you in pricing your products competitively.
Once you are awarded a contract to supply goods, you start executing the order. The following diagram depicts the export business cycle :
You require financing at two stages – initially, to process the order and then to bridge the gap between the time you ship the goods to the time you actually receive the payment. Export financing has been designed to take care of these needs.
Export finance can be broadly classified into two categories, depending upon the stage of ‘export activity’ at which the finance is availed. The two types of export financing are :
- Pre-Shipment Finance.
- Post-Shipment Finance.
So what is this ‘pre-shipment finance’ and ‘post-shipment finance’ ? Its very simple really, - financial assistance availed prior to the shipment of goods is termed pre-shipment finance, while financial assistance availed after shipment of goods is termed post-shipment finance.
An additional benefit that an exporter can avail of relates to the 'Exchange Earners Foreign Currency Account' (EEFC). This is a facility by which an exporter can maintain an account, with a Bank in India, expressed in foreign currency and titled EEFC account. Amounts that can be credited to this account cannot exceed 50% of inward remittances from the export transactions (70% in the case of 100-pct EOUs or units located in export processing zones).
Now that we have a basic understanding of facilities available to exporters, let us discuss different aspects of pre-shipment finance, post-shipment finance and impact of currency movement on export pricing in detail.
Click here to go to section on Pre Shipment Finance .
Click here to go to the section on Post Shipment Finance.
Click here to understand when does foreign currency risk arise?
