Export Bill Discounting

Export bill discounting is a form of post-shipment finance in which an exporter's bank pays the value of a usance (time) export bill before it falls due, deducting interest and charges for the period until the foreign buyer pays. The exporter gets cash soon after shipment instead of waiting 30 to 180 days. Banks offer it to exporters of all sizes, and in South Asia it is one of the main working-capital products for exporters.

The bill may be drawn under a letter of credit or sent on collection, and that choice largely decides the bank's risk and price. Discounting is a bank lending product, usually with recourse to the exporter, which separates it from non-recourse factoring and forfaiting. Bills under credits are governed by UCP 600, and collections by URC 522; local central bank rules cover tenor, currency and the repatriation of proceeds.

An exporter ships a container of goods and the buyer abroad has agreed to pay in three months. The exporter has bills to pay now, so it takes the paperwork for the sale to its own bank. The bank pays out most of the money straight away and keeps a small slice as its fee for waiting.

When the three months are up, the overseas buyer, or the buyer's bank, pays, and that payment settles what the exporter owes the bank. If the buyer is backed by a bank promise, the exporter's bank feels safe and charges little. If there is only the buyer's word, the bank charges more and keeps the right to ask the exporter for the money back if the buyer never pays.

1. The exporter ships the goods and prepares the documents, including the draft, commercial invoice and bill of lading.
2. It presents them to its bank with a request to discount the bill.
3. For an LC bill, the bank checks the documents for compliance; for a collection, it checks them against the sale contract and sends them to the presenting bank.
4. The bank credits the exporter with the discounted amount, often converting foreign currency at the day's rate.
5. At maturity the importer or the bank obliged under the credit pays, and the proceeds settle the discount.

When the bill is an accepted trade acceptance under a D/A collection, the bank relies on the importer's signature. When it is a draft accepted or deferred-payment undertaking given under a usance letter of credit, the bank relies on a foreign bank, and the price is much lower.

Banks charge interest for the usance period plus a "normal transit period", the time it takes for documents to reach the buyer's bank and for funds to come back. The proceeds are:

• $F$ is the bill amount in foreign currency.
• $S$ is the exchange rate used to convert it into local currency.
• $r$ is the annual discount rate.
• $t$ is the usance period and $n$ the transit period, in days.
• $c$ is the fixed bank charges.

An exporter discounts a USD 40,000 bill at 90 days' sight, with a 20-day transit period, a rate of 280 local units per dollar, an 8 percent rate and charges of 5,000. The converted value is 11,200,000. Interest is 11,200,000 × 0.08 × 110/360, about 273,778. Proceeds are about 10,921,222. If the buyer pays late, the bank charges overdue interest from the expected date.

In India, export credit, including post-shipment discounting, falls under Reserve Bank of India directions on rupee and foreign-currency export credit and on the export of goods, which set maximum periods for realising proceeds. Pakistan's State Bank runs export finance schemes and requires proceeds to be repatriated within set time limits, which banks track bill by bill under export proceeds repatriation rules. Discounted bills in these markets are often reported under bills purchased and discounted, the broader banking line that also includes sight bills bought outright. The exporter may first use packing credit to make the goods, which is then repaid from the discounted bill.

The bank's main risks are importer default on collection bills, discrepant documents under a credit, and country, sovereign or transfer risk where the buyer's government restricts foreign exchange. Banks reduce these through recourse to the exporter, export credit insurance and limits on each buyer and country. Compliance teams screen vessels, ports and parties against the sanctions list and check that invoice prices make sense, since over- or under-invoiced bills are a sign of trade-based money laundering.

• Reserve Bank of India
• State Bank of Pakistan
• International Chamber of Commerce