Sources of External Finance :- The main sources of external Finance for the developing countries could be classified on the following broad heads :-
I. Bilateral Aid
II. Multilateral agencies like the IMF, World Bank & Asian Development Bank.
III. Export Credit offered by the Industrial Countries to finance export of Capital Goods to the developing world.
IV. Commercial Markets.
V. Miscellaneous Sources – Like Domestic markets of different countries and the Euro or Offshore markets.
1.Official Development Assistance : - This comprises both bilateral aid and assistance provided through replenishment of resources of multilateral soft – lending agencies like IDA(International Development Association) , funds of regional development banks, UN
etc. Some of this assistance comes in the form of grants as well.
2.Multilateral Agencies: Commercial Terms Debt :- Though the loans from agencies like world Bank or The Asian Development bank are considered to be concessional and cheaper but these banks lend at about ½ % above their average borrowing cost .Most of
these are for financing big projects wherein global tenders have to be called by the borrowing country. These loans are guaranteed by the government of the borrowing country. Now days world bank also invites commercial banks to participate in financing specific projects.
The International Finance Corporation Washington is the only multilateral agency for the private sector .It gives both floating as well as fixed rate loans.
The International Monetary Fund is the only institution providing loans not only for development projects but also for BOP difficulties facing countries.
3.Export Credits :- The objective of starting the scheme of Export Credit Schemes was to help exporters particularly of Capital Goods, to extend credit to the buyers and promote exports. Due to unhealthy competition among different countries – at the initiative of US a consensus was arrived at governing subjects as interest rates, period of credit, moratorium (in case of turnkey projects) and other repayment terms. The rate of interest is normally linked to London Interbank Offered Rate(LIBOR).
Suppliers Credit : – under suppliers credit the exporters supplier extends a credit to the buyer Importer of Capital goods . Generally the terms are 10 to 20 percent down payment and the balance payable in 10 equal half yearly installments. To provide the suppliers credit the exporter normally obtained a loan from his banker which is covered by export credit insurers in the country.
Buyers Credit :- In this case the buyer importer raises a loan from a bank in the exporters country under the export credit scheme in force & terms confirming to the export credit scheme in force. This is also covered under export credit scheme.
The EXIM bank provides the facility and also provides line of credit to promote exports of capital Goods.
Miscellaneous Sources :- FCNR deposits – To provide Pre Shipment in foreign Currency or to rediscount export bills.
Short Term Credits :- Credit from the supplier up to 180 days from shipment date at rates prescribed by RBI..
Forfeiting:- is the purchase of medium term claims of an exporter on the foreign buyer without recourse to the exporter. This is a commercial source of finance and no cost such as insurance etc. is involved