What is Export Bill Discounting? Meaning, Process & Benefits for Exporters

In international trades, buyers prefer a longer credit period, while sellers are in constant shortage of working capital to finance their operational expenses. Export bill discounting (EBD) is a financial mechanism that bridges the gap of expectations between both parties to a cross-border trade. 

Key Takeaways

• Export bill discounting allows exporters to cash export orders against the submission of valid bills of exchange and other trade documents. 
• It helps exporters prevent risks of working capital getting locked up in unpaid dues from buyers. 
• Banks discount export bills in exchange for fees depending on risks involved in the trade, e.g., export bill discounting under LC (Letter-of-Credit) and "with recourse" bills are safer.  
• Access to export bill discounting facilities makes exporting less capital-intensive for traders and manufacturers compared to domestic trades. 

What is Export Bill Discounting?

Export bill discounting is a short-term financing tool where exporters sell usance bills of exchange (BoE) to banks or financial institutions at a discount, receiving immediate cash (typically 80-95% of invoice value) before the importer's payment due date.

The discount, covering interest, fees, and risks (e.g., tenor, buyer creditworthiness, LC backing) varies by days to maturity and RBI export credit rates (4-8% p.a.).

For instance, let’s consider a ₹10 lakh BoE due in 120 days at 6% p.a.
Interest = ₹10L × 0.06 × (120/360) = ₹20,000
Exporter receives ₹9.8 lakhs (after fees).

Export Bill Discounting under a Letter of Credit (LC)

Export bill discounting under LC is a secured mechanism of bill discounting for exporters. Under this mechanism, importer's bank issues irrevocable LC guaranteeing payment if documents comply; exporter's bank discounts securely. This type of bill of exchange is safer, and thus cheaper, for banks and FIs to discount.

How does it work?

1. Exporters ship goods against letters of credit from importers' banks and draft bills of exchange based on the LC.
2. Once shipped, exporters submit BOE and LC documents to negotiating banks (exporters' bank). 
3. The negotiating bank verifies and reviews the documents and checks compliance with LC terms and conditions. 
4. Once verified and approved by the compliance team, banks discount the bill at prevailing discounting rates and transfer the discounted value of the bill to the exporter's bank account.  

Export Bill Discounting Process in India

The process of export bill discounting in India is straightforward, and the workflow is regulated under the RBI and the FEMA (Foreign Exchange Management Act) guidelines. However, dealing with banks and bank branches with dedicated export financing verticals makes discounting a lot easier. 

1. Step 1 (AGREEMENT) - Usually, exporters willing to avail discounting services often negotiate and set up EBD limits with their banks. Banks approve such limits based on an exporter's business history and creditworthiness. 
2. Step 2 (SHIPPING) - The actual discounting process starts with the shipment of ordered goods to importers. Once shipped, exporters prepare documents for submission to banks as proof of export delivery. This may include a packing list, bill of lading, LC, etc. 
3. Step 3 (SUBMISSION) - Once the documents are prepared, exporters are required to submit the same to the negotiating banks, along with the Usance Bill of Exchange. 
4. Step 4 (VERIFICATION) - Banks verify each of the submitted documents and decide on the appropriate discounting rate for a specific bill of exchange. Terms and Conditions are standard, e.g., a bill of exchange against an LC attracts a lower discount rate than one without an LC. 
5. Step 5 (DISBURSEMENT) - Verification usually takes 24 to 48 hours. A fully digitised workflow often takes less time to verify. After that, the bank deducts the charges and disburses the discounted value of the bill. 
6. Step 6 (DISPATCH) - Once documents are verified, banks also dispatch those documents for a specific bill of exchange to the importers' overseas banks. 

Documents Required in Export Bill Discounting

The primary documents essential for export bill discounting are:

• Usance Bill of Exchange ordering the importer to pay the pre-specified sum of money at a pre-specified date
• Invoice: Details of goods, value, and terms of trade
• Bill of Lading or Airway Bill, depending on the method of transport 
• Packing List detailing physical packaging of goods

Additional documents that can be required on a case-by-case basis are:

• Letter of credit 
• Insurance of the shipped order 
• Certificate of origin for the export
• FEMA declaration 

Examples of Export Bill Discounting

Scenario 

• Exporter: Arvind Mills Ltd. (India)
• Importer: New Fashion Inc. (Singapore)
• Bill value: $100,000
• Payment terms: 90 Days from the Bill of Lading date.
• Bank's discount rate: 6% per annum 

Calculation of discounted value: 

• Interest for $100,000 credit for 90 day = ($(100,000*6%)/ 360)*90 = $1500 
• Banks will deduct $1500 from the actual bill value and disburse ($100,000-$1500) or $98,500 to the exporter. 

Benefits of Export Bill Discounting

• Improves operational cash flow for exporters. 
• Helps provide better credit terms to importers, making exports competitive in global markets.
• Saves exporters from currency fluctuations during the credit period. 

Besides, export bill discounting against valid shipment documents and LC is a reasonably secure instrument. It does not require collateral. This makes the cost of discounting cheaper for small and medium-sized exporters. 

Disadvantages of Export Bill Discounting

• Discounting without LC bills often requires "with recourse" obligation for exporters. It does not help to fully prevent counterparty risks. 
• Banks usually set a limit for exporters, and expanding that limit requires time. It may not be possible to discount bills if the limit is exceeded in case of a sudden surge in export orders.  
• Costs of discounting often increase for exports to smaller countries and new territories. It makes diversifying export business to new regions difficult initially.