[Submitted by CA. Vibhuti Gupta,
April 16, 2008
Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. The main objectives behind preshipment finance or pre export finance are to enable exporter to:
- Procure raw materials.
- Carry out manufacturing process.
- Provide a secure warehouse for goods and raw materials.
- Process and pack the goods.
- Ship the goods to the buyers.
- Meet other financial cost of the business.
Types of Pre Shipment Finance
- Packing Credit
- Advance against Cheques/Draft etc. representing Advance Payments.
Packing Credit - is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
Packing Credit is extended in the following forms:
- Packing Credit in Indian Rupee
- Packing Credit in Foreign Currency (PCFC)
Requirements for Getting Packing Credit
This facility is provided to an exporter who satisfies the following criteria
- A ten digit Importer - Exporter Code ( IE Code ) number allotted by DGFT.
- Exporter should not be in the caution list of RBI.
- If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:
- Formal application for releasing the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due time and submit the relevant shipping documents to the banks within prescribed time limit.
- Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.
- License issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.
Different Stages of Packing Credit
I. Appraisal and Sanction of Limits - Before making any an allowance for Credit facilities, banks need to check the different aspects like product profile, political and economic details about country. Apart from these things, the bank also looks in to the status report of the prospective buyer, with whom the exporter proposes to do the business.
The Bank extended the packing credit facilities after ensuring the following :-
- The exporter is a regular customer, a bona fide exporter and has a goods standing in the market.
- Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not.
- Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries (RCC) or not.
II. Disbursement of Packing Credit Advance - Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed.
Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provides a special packing credit facility and is known as Running Account Packing.
Before disbursing the bank specifically check for the following particulars in the submitted documents"
- Name of buyer
- Commodity to be exported
- Value (either CIF or FOB)
- Last date of shipment / negotiation.
- Any other terms to be complied with
The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped.
In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by drafts/bankers/cheques.
The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods.
The maximum duration of packing credit period is 180 days; however bank may provide a further 90 days extension on its own discretion, without referring to RBI.
III. Follow up of Packing Credit Advance - Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the rate of submission of these stocks.
IV. Liquidation of Packing Credit Advance - Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting pre- shipment credit into post shipment credit. In case if the export does not take place then the entire advance can also be recovered at a certain interest rate. RBI has allowed some flexibility in to this regulation under which substitution of commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the packing credit advance may be repaid by proceeds from export of the same or another commodity to the same or another buyer. However, bank need to ensure that the substitution is commercially necessary and unavoidable.
V. Overdue Packing - Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure.
Packing Credit in Foreign Currency (PCFC)
Authorized dealers are permitted to extend Pre-shipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders. The rate of interest on PCFC is linked to London Inter-bank Offered Rate (LIBOR). The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the exporter.
The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign Currency(Non Resident) Accounts.
Advance against Cheque/Drafts received as advance payment - Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don't wait for the importer to deposit the funds.
The features of post-shipment finance are:
- Post-shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.
- A post-shipment finance is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.
- Post -shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating.
- As a quantum of finance, post-shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government.
- Post-shipment finance can be of short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.
Financing For Various Types of Export Buyer's Credit
Post-shipment finance can be provided for three types of export :
- Physical exports: Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred.
- Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies.
- Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.
Types of Post Shipment Finance :-
The post shipment finance can be classified as :
- Export Bills purchased/discounted.
- Export Bills negotiated
- Advance against export bills sent on collection basis.
- Advance against export on consignment basis
- Advance against undrawn balance on exports
- Advance against claims of Duty Drawback.
Export Bills Purchased/ Discounted. (DP & DA Bills) - Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility.
Export Bills Negotiated (Bill under L/C) - The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC.
However, this arises two major risk factors for the banks:
- The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit.
- The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So, it is important for the for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.
Advance against Export Bills Sent on Collection Basis - Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill.
The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance.
Advance against Export on Consignments Basis - Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports.
Advance against Undrawn Balance - It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within stipulated time from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.
Advance Against Claims of Duty Drawback - Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets.
In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank.
After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.