What is LOC?
Exim Bank extends Lines of Credit (LOCs) to overseas financial institutions, regional development banks, sovereign governments and other entities overseas, to enable buyers in those countries, to import goods and services from India on deferred credit terms. The Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. LOC is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters, especially to SMEs, and serves as an effective market entry tool. Exim Bank extends LOCs, on its own, as well as, at the behest of Government of India.
How does LOC work?
1. Exim Bank signs LOC Agreement with overseas Borrower Institution (Borrower) and announces the availability of LOC for utilization, when the Agreement becomes effective.
2. Exporter checks with Exim Bank, available amount under the LOC and quantum of service fee payable to Exim Bank, if any, and negotiates contract with Importer.
3. Importer approaches the Borrower for approval of the contract.
4. Borrower appraises the proposal. If satisfied, approves the contract and refers to Exim Bank for concurrence for inclusion of contract for being financed under the LOC.
5. Exim Bank accords approval to the contract, if in conformity with the terms of LOC. Exim Bank conveys contract approval to the exporter and the Borrower.
6. The Importer arranges remittance of advance payment to the Exporter and also opening of a Letter of Credit, which states that the contract is covered under Exim Bank's LOC to the Borrower and reimbursement will be by Exim Bank for the Eligible Value of Credit, upon compliance with stipulated conditions therein.
7. Exporter executes the contract/ships the goods/provides services.
8. Exim Bank/commercial bank in India, designated as the Negotiating Bank negotiates shipping documents and pays the exporter.
9. Exim Bank reimburses the Negotiating Bank, on receipt of valid claim and
service fee, as applicable, by debit to the LOC account of the Borrower.
10. Borrower repays Exim Bank on due dates.