Export Finance Preshipment

8/9/2019 Export Finance Preshipment

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Export Finance: Pre-shipment and Post-Shipment Finance

by DK Sinha Finance

Export Finance: Pre-shipment and Post-Shipment Finance!

The term ‘export finance’ refers to credit facilities and techniques of payments at

the pre-shipment and post-shipment stages. Export finance hether short-term

or medium term! is pro"ided exclusi"ely by the #ndian and foreign commercial

ban$s hich are the members of the %oreign Exchange Dealers &ssociation.

The 'eser"e (an$ of #ndia )'(#* and the #ndustrial De"elopment (an$ of #ndia

)#D(#* pro"ide refinance facilities to the commercial ban$s. Export-#mport (an$

of #ndia )commonly $non as E+#, (an$* also extends finance to exporters andto o"erseas proects abroad oint "entures and construction proects abroad.

Pre-shipment Finance:

re-shipment finance refers to the financial assistance pro"ided to the exporters

before actual shipment of goods. re-shipment finance is pro"ided to the

exporters for the purposes li$e purchase of ra materials! their processing and

con"erting into finished goods and pac$aging them.

For these purposes, the following pre-shipment finance is madeavailable:

/. ac$aging credit

0. &d"ance against #ncenti"es

1. &d"ance against Duty Drabac$.

re-shipment credits are granted by the ban$s under concessional rates of

interest at 2.3 per cent. 4redit can be extended up to a maximum period of 5months.

Post-Shipment Finance:

ost-shipment finance may be as 6any loan or ad"ance granted or any other

credit pro"ided by a ban$ to an exporter of goods from #ndia from the date of

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extending the credit after shipment of goods to the date of reali7ation of export

proceeds.8

Thus! post-shipment finance ser"es as bridge loan for the period beteen

shipment of goods and the reali7ation of proceeds. Such loan is usually pro"idedfor a maximum period of 5 months. #nterest is charged at the rate of 9.53 per

cent.

(usiness in"ol"es ris$ but export business is more prone to ris$s. :ith a "ie to

reduce ris$ element in export business! the go"ernment has set up the Export

4redit and ;uarantee 4orporation )E4;4* hich pro"ides export assistance in

the form of insurance co"er and guarantees. There is also an Export #nspection

4ouncil of #ndia )E#4#* hich extends financial assistance to the exporters for the

quality control purposes.

Export Pre Shipment and PostShipment Finance.

Types of Pre Shipment Finance

Requirment for Getting Packing Credit

Eligiility

!uantum of Finance

"i#erent Stages of PreShipment Finance

$ppraisal and Sanction of %imits

"isursement of Packing Credit $d&ance



Follo' up of Packing Credit $d&ance

%iquidation of Packing Credit $d&ance

(&erdue Packing

Special Cases

Packing Credit to Su Supplier

Running $ccount facility

Preshipment Credit in Foreign Currency )PCFC*

Packing Credit Facilities to deemed Exports

Packing Credit facilities for Consulting Ser&ices

$d&ance against Cheque + "rafts recei&ed as ad&ance payment

Pre Shipment Finance is issued y a ,nancial institution 'hen the seller 'ant the

payment of the goods efore shipment. The main o-ecti&es ehind preshipment

,nance or pre export ,nance is to enale exporter to

Procure ra' materials.

Carry out manufacturing process.

Pro&ide a secure 'arehouse for goods and ra' materials.

Process and pack the goods.

Ship the goods to the uyers.

/eet other ,nancial cost of the usiness.

Types of Pre Shipment Finance

Packing Credit

$d&ance against Cheques+"raft etc. representing $d&ance Payments.

Preshipment ,nance is extended in the follo'ing forms

Packing Credit in 0ndian Rupee

Packing Credit in Foreign Currency )PCFC*



Requirment for Getting Packing Credit

This facility is pro&ided to an exporter 'ho satis,es the follo'ing criteria

$ ten digit importerexporter code numer allotted y "GFT.

Exporter should not e in the caution list of R10.

0f the goods to e exported are not under (G% )(pen General %icence*2 the exporter

should ha&e the required license +quota permit to export the goods.

Packing credit facility can e pro&ided to an exporter on production of the follo'ing

e&idences to the ank

Formal application for release the packing credit 'ith undertaking to the e#ect thatthe exporter 'ould e ship the goods 'ithin stipulated due date and sumit the

rele&ant shipping documents to the anks 'ithin prescried time limit.

Firm order or irre&ocale %+C or original cale + fax + telex message exchange

et'een the exporter and the uyer.

%icence issued y "GFT if the goods to e exported fall under the restricted or

canali3ed category. 0f the item falls under quota system2 proper quota allotment

proof needs to e sumitted.

The con,rmed order recei&ed from the o&erseas uyer should re&eal theinformation aout the full name and address of the o&erseas uyer2 description

quantity and &alue of goods )F(1 or C0F*2 destination port and the last date of

payment.

Eligiility

Pre shipment credit is only issued to that exporter 'ho has the export order in his

o'n name. 4o'e&er2 as an exception2 ,nancial institution can also grant credit to athird party manufacturer or supplier of goods 'ho does not ha&e export orders in

their o'n name.

0n this case some of the responsiilities of meeting the export requirements ha&e

een out sourced to them y the main exporter. 0n other cases 'here the export



order is di&ided et'een t'o more than t'o exporters2 pre shipment credit can e

shared et'een them

!uantum of Finance

The !uantum of Finance is granted to an exporter against the %C or an expected

order. The only guideline principle is the concept of 5eed1ased Finance. 1anks

determine the percentage of margin2 depending on factors such as

The nature of (rder.

The nature of the commodity.

The capaility of exporter to ring in the requisite contriution.

"i#erent Stages of Pre Shipment Finance

$ppraisal and Sanction of %imits

6. 1efore making any an allo'ance for Credit facilities anks need to check the

di#erent aspects like product pro,le2 political and economic details aout country.

$part from these things2 the ank also looks in to the status report of the

prospecti&e uyer2 'ith 'hom the exporter proposes to do the usiness. To check all

these information2 anks can seek the help of institution like ECGC or 0nternational

consulting agencies like "un and 1rad street etc.

The 1ank extended the packing credit facilities after ensuring the follo'ing7

The exporter is a regular customer2 a ona ,de exporter and has a goods standing

in the market.

8hether the exporter has the necessary license and quota permit )as mentioned

earlier* or not.

8hether the country 'ith 'hich the exporter 'ants to deal is under the list of

Restricted Co&er Countries)RCC* or not.

"isursement of Packing Credit $d&ance

9. (nce the proper sanctioning of the documents is done2 ank ensures 'hether

exporter has executed the list of documents mentioned earlier or not. "isursement

is normally allo'ed 'hen all the documents are properly executed.



Sometimes an exporter is not ale to produce the export order at time of a&ailing

packing credit. So2 in these cases2 the ank pro&ide a special packing credit facility

and is kno'n as Running $ccount Packing.

1efore disursing the ank speci,cally check for the follo'ing particulars in the

sumitted documents7

5ame of uyer

Commodity to e exported

!uantity

:alue )either C0F or F(1*

%ast date of shipment + negotiation.

$ny other terms to e complied 'ith

The quantum of ,nance is ,xed depending on the F(1 &alue of contract +%C or the

domestic &alues of goods2 'hiche&er is found to e lo'er. 5ormally insurance and

freight charged are considered at a later stage2 'hen the goods are ready to e

shipped.

0n this case disursals are made only in stages and if possile not in cash. The

payments are made directly to the supplier y drafts+ankers+cheques.

The ank decides the duration of packing credit depending upon the time required

y the exporter for processing of goods.

The maximum duration of packing credit period is 6;< days2 ho'e&er ank may

pro&ide a further =< days extension on its o'n discretion2 'ithout referring to R10.

Follo' up of Packing Credit $d&ance



>. Exporter needs to sumit stock statement gi&ing all the necessary information

aout the stocks. 0t is then used y the anks as a guarantee for securing the

packing credit in ad&ance. 1ank also decides the rate of sumission of this stocks.

$part from this2 authori3ed dealers )anks* also physically inspect the stock at

regular inter&als.

%iquidation of Packing Credit $d&ance

?. Packing Credit $d&ance needs e liquidated out of as the export proceeds of the

rele&ant shipment2 therey con&erting preshipment credit into postshipment credit.

This liquidation can also e done y the payment recei&ale from the Go&ernment

of 0ndia and includes the duty dra'ack2 payment from the /arket "e&elopment

Fund )/"F* of the Central Go&ernment or from any other rele&ant source.

0n case if the export does not take place then the entire ad&ance can also e

reco&ered at a certain interest rate. R10 has allo'ed some @exiility in to this

regulation under 'hich sustitution of commodity or uyer can e allo'ed y a

ank 'ithout any reference to R10. 4ence in e#ect the packing credit ad&ance may

e repaid y proceeds from export of the same or another commodity to the same

or another uyer. 4o'e&er2 ank need to ensure that the sustitution is

commercially necessary and una&oidale.

(&erdue Packing

A. 1ank considers a packing credit as an o&erdue2 if the orro'er fails to liquidate

the packing credit on the due date. $nd2 if the condition persists then the ank

takes the necessary step to reco&er its dues as per normal reco&ery procedure.

Special Cases

Packing Credit to Su Supplier

6. Packing Credit can only e shared on the asis of disclaimer et'een the Export

(rder 4older )E(4* and the manufacturer of the goods. This disclaimer is normally

issued y the E(4 in order to indicate that he is not a&ailing any credit facility

against the portion of the order transferred in the name of the manufacturer.



This disclaimer is also signed y the ankers of E(4 after 'hich they ha&e an option

to open an inland %+C specifying the goods to e supplied to the E(4 as a part of

the export transaction. (n asis of such an %+C2 the susupplier ank may grant a

packing credit to the susupplier to manufacture the components required for

exports.

(n supply of goods2 the %+C opening ank 'ill pay to the su supplierBs ank against

the inland documents recei&ed on the asis of the inland %+C opened y them.

The ,nal responsiility of E(4 is to export the goods as per guidelines. $ny delay in

export order can ring E(4 to penal pro&isions that can e issued anytime.

The main o-ecti&e of this method is to co&er only the ,rst stage of production

cycles2 and is not to e extended to co&er supplies of ra' material etc. Runningaccount facility is not granted to susuppliers.

0n case the E(4 is a trading house2 the facility is a&ailale commencing from the

manufacturer to 'hom the order has een passed y the trading house.

1anks ho'e&er2 ensure that there is no doule ,nancing and the total period of

packing credit does not exceed the actual cycle of production of the commodity.

Running $ccount facility

9. 0t is a special facility under 'hich a ank has right to grant preshipment ad&ance

for export to the exporter of any origin. Sometimes anks also extent these facilities

depending upon the good track record of the exporter.

0n return the exporter needs to produce the letter of credit + ,rms export order

'ithin a gi&en period of time.

Preshipment Credit in Foreign Currency )PCFC*

>. $uthorised dealers are permitted to extend Preshipment Credit in Foreign

Currency )PCFC* 'ith an o-ecti&e of making the credit a&ailale to the exporters at

internationally competiti&e price. This is considered as an added ad&antage under

'hich credit is pro&ided in foreign currency in order to facilitate the purchase of ra'

material after ful,lling the asic export orders.



The rate of interest on PCFC is linked to %ondon 0nterank (#ered Rate )%01(R*.

$ccording to guidelines2 the ,nal cost of exporter must not exceed <.AD o&er

month %01(R2 excluding the tax.

The exporter has freedom to a&ail PCFC in con&ertile currencies like S"2 Pound2

Sterling2 Euro2 en etc. 4o'e&er2 the risk associated 'ith the cross currency

truncation is that of the exporter.

The sources of funds for the anks for extending PCFC facility include the Foreign

Currency alances a&ailale 'ith the 1ank in Exchange2 Earner Foreign Currency

$ccount )EEFC*2 Resident Foreign Currency $ccounts RFC)"* and Foreign

Currency)5onResident* $ccounts.

1anks are also permitted to utili3e the foreign currency alances a&ailale under

Escro' account and Exporters Foreign Currency accounts. 0t ensures that the

requirement of funds y the account holders for permissile transactions is met. 1ut

the limit prescried for maintaining maximum alance in the account is not

exceeded. 0n addition2 1anks may arrange for orro'ings from aroad. 1anks may

negotiate terms of credit 'ith o&erseas ank for the purpose of grant of PCFC to

exporters2 'ithout the prior appro&al of R102 pro&ided the rate of interest on

orro'ing does not exceed <.AD o&er month %01(R.

Packing Credit Facilities to "eemed Exports

?. "eemed exports made to multilateral funds aided pro-ects and programmes2

under orders secured through gloal tenders for 'hich payments 'ill e made in

free foreign exchange2 are eligile for concessional rate of interest facility oth at

pre and post supply stages.

Packing Credit facilities for Consulting Ser&ices

A. 0n case of consultancy ser&ices2 exports do not in&ol&e physical mo&ement of

goods out of 0ndian Customs Territory. 0n such cases2 Preshipment ,nance can e

pro&ided y the ank to allo' the exporter to moili3e resources like technical

personnel and training them.



$d&ance against Cheque+"rafts recei&ed as ad&ance payment

. 8here exporters recei&e direct payments from aroad y means of

cheques+drafts etc. the ank may grant export credit at concessional rate to the

exporters of goods track record2 till the time of reali3ation of the proceeds of the

cheques or draft etc. The 1anks ho'e&er2 must satisfy themsel&es that the

proceeds are against an export order.

1ank Pre shipment Finance to exporters

Sunday2 (ctoer 692 9<6? Category Export 0ndia

1ank loan to exporters1ank Pre shipment Finance to exporters

0 ha&e 'ritten aout Packing credit+Pre shipment credit2 'here in 0 ha&e explained

asic idea aout Pre shipment Finance pro&ided y ank.

8hat is Pre shipment loanH

$ny ad&ance or loans or any credit extended to exporters y ank for the purpose

of manufacturing2procuring2processing or packing of goods efore shipment can e

called PreIShipment ,nance. Pre shipment ,nance is also gi&en as 'orking capital

expenses to'ards ser&ices on the asis of %C )letter of credit* in fa&or of exporter or

in fa&or of some other person y o&erseas uyer or his ehalf or any other

e&idence.

8hat is the period of Packing Credit+Pre shipment ,nance to exporters y ankH

5ormally2 period of pre shipment ,nance is determined y the ank ased on the

circumstances of indi&idual case. Each exporter requires pre shipment ,nance

ased on their nature of requirements such as time for procuring export goods2

processing or manufacturing and shipping. (nce after otaining Pre Shipment loan

from ank2 exporter sumits necessary export documents 'ith ank immediately up

on each shipment takes place. (nce o&erseas uyer paid exporterJs ill against



export of goods2 ank ad-ust such reali3ed amount 'ith the pre shipment loan

already pro&ided to exporter.

1ank loans to exporters as packing credit

8hat happens2 if export ills not sumitted after a&ailing pre shipment ,nanceH

$s per ank guidelines2 exporter is required to sumit export documents 'ith ank

after export takes place. 0f pre shipment ad&ances are not ad-usted y sumission

of export documents 'ithin >< days from the date of ad&ance2 the ad&ances 'ill

cease to qualify for prescried rate of interest for export credit to the exporter. The

commercial interest rate is charged from the date of disursement of pre shipment

,nance. Re,nance is pro&ided y Reser&e 1ank for a maximum period of 6;< days

'ith permission.

4o' does ank disurse PreIShipment FinanceH

1ank may release Pre Shipment Finance either in lump sum or in stages ased on

the requirements of exporter 'ith satisfaction y ank against execution of export

order. 1ank maintains separate account for Packing Credit +Pre shipment ,nance to

monitor the period of sanction of such pre shipment loan and end use of amount.

The &arious stages of processing2manufacturing is monitored y ank y

maintaining a separate account to ensure that the outstanding alance in accounts

are ad-usted y transfer from one account to the other and ,nally y proceeds of

relati&e export documents on purchase2 discount2 etc. The ma-or threat of ank is to

monitor time to time on the progress of ful,llment of export orders y exporters.

Exporters are required to update 'ith ank on the changes or amendment in export

orders on addition or deletion of export orders.

Documents

Export Finance Preshipment