Features of Pre-Shipment Finance

Features of Pre-Shipment Finance

The features of pre-shipment finance are as under:

 

(a) Eligibility: Pre-shipment finance is available to all types of exporters such as:

Merchant exporters;

Manufacturer exporters;

Export and Trading houses:

Manufacturers supplying goods to Export Houses (EH) Trading houses (TH) or merchant exporters.

The above categories of exporters are eligible for pre subject to certain conditions:

Exporter should not be in the caution list of Reserve Bank of India (RBI).

If the goods to be exported are not covered under Open General Licence (OGL), then he should have the required license/quota permit for export for export.

Licence 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.

(b) Documentary Evidence: Following documents are required to be submitted by the direct exporter for availing pre-shipment finance:

A confirmed export order/contract; and/or

An irrevocable letter of credit opened in the favour of the exporter; or

Original cable/fax/telex message exchanged between the exporter and the buyer.

Where it is not available, an undertaking stating that the same will be produced to the bank within reasonable time for verification and endorsement should be submitted.

An undertaking that the advance will be utilized for the specific purposes for which it has been procured.

Indirect exporters who export through export houses, trading houses. merchant exporters or State Trading Corporation are also eligible for packing credit on the production of the following documents:

A letter from the concerned export house/trading house certifying the portion of export order allotted in their favour; and

An undertaking from the concerned export house/trading house stating that they do not wish to obtain packing credit facility against the same transaction for the same purpose till the original credit is liquidated.

Apart from the above primary documents, a number of other documents are required to be submitted:

An undertaking that the goods would be shipped and the relevant shipping documents would be submitted to bank within a stipulated time period.

Copies of income tax and wealth tax assessment orders for the last two to three years in the case of sole of sole proprietorship or a partnership firm.

A copy of partnership deed in case of partnership firm, Memorandum and Articles of Association in the case of a company.

A copy of certificate of incorporation and certificate of commencement of business in the case of a company.

A copy of board resolution for opening an account and letter of authority top operate the account in the case of a company.

Copy of Importer's Exporter's Code Number allotted by the Director General for Foreign Trade (DGFT).

Copy of valid Registration-cum-Membership Certificate of the exporter himself or the export house/trading house.

Appropriate policy or guarantee from Export Credit & Guarantee Corporation of India (ECGE).

Any other document required by the bank.

(c) Purpose: Packing credit is granted for specific purposes such as purchase, processing, manufacturing or packing of goods as defined by the Reserve Bank of India. Various purposes for which pre-shipment finance is granted are:

To acquire raw materials, components, machinery, equipments and technology required for export production.

To take measure for improving quality of goods so as to conform to international standards.

To adapt product to the requirements of foreign markets, improve existing products, product addition and product extension.

To conform to international packing and packaging standards, labelling and marking, etc.

To procure goods from domestic market in the case of merchant exporters.

To pay for customs and excise clearance and pre-shipment inspection.

To store the goods in warehouses before shipment.

To pay for internal transportation and marine freight.

To open and maintain foreign offices for export promotion abroad.

To pay for export documentation.

(d) Amount of Finance: Banks are free to determine the amount of pre-shipment finance. The only guideline principle is the concept of Need Based Finance. Banks determine the percentage of margin, depending on factors such as:

The nature of order.

The nature of the commodity.

The capability of exporter to bring in the requisite contribution.

Before making any allowance for credit facilities, banks need to check different aspects like product profile and political and economic details about the country. Apart from these things, the bank also looks into the status report of the prospective buyer, with whom the exporter proposes to do the SL the country. Apart business. To check all this information, banks can seek the help of institution like ECGC or International consulting agencies like Dun and Brad Street etc

The amount of packing credit is based on:

The amount of export order;

The credit rating of the exporter done by the bank and;

The exporter's receivables on account of incentives like International Price Reimbursement Scheme (IPRS), duty drawback (DBK), etc.

Generally, the amount of packing credit does not exceed the FOB value of goods to be exported or their domestic value whichever is less.

(e) Period of Credit and Rate of interest: The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension at its own discretion, without referring to RBI.

In order to boost exports from India, the Reserve Bank of India (RBI) has instructed the banks to grant pre-shipment advance at a concessional rate of dig interest. Interest rates on pre-shipment finance advances are revised by the of Reserve Bank of India (RBI) from time to time.

As per the guidelines issued by the Reserve Bank of India (RBI) on 29th April 2009 to all scheduled commercial banks, interest rates effective from 1st May 2009 to 31st October 2009 will not be exceeding Benchmark Prime Lending Rate (BPLR) minus 2.5 percentage points per annum for the following categories of pre-shipment finance:

Pre-shipment credit upto 270 days.

Pre-shipment credit against incentives receivable from the Government covered by the ECGC guarantee upto 90 days.

These are the ceiling rates and therefore the banks are free to charge any rate below the ceiling rates. Interest rates for the above mentioned categories of pre-shipment credit beyond the tenors have been deregulated and therefore the banks are free to decide the rate of interest, keeping in view the BPLR and spread guidelines.

(f) Disbursement of Packing Credit Advance: Once the proper scrutiny of the documents is done, the bank ensures whether the exporter has executed. the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Before the disbursement of loan, the bank requires exporter to execute a formal loan agreement. It also ensures whether the following information has been submitted or not:

Name of the buyer,

Commodity to be exported.

Quantity and other specifications.

Value of goods, either CIF or FOB.

Last date of shipment/negotiation.

Any other terms to be complied with

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 Credit.

Though, the entire amount of packing credit is sanctioned at one time, it is generally released in instalments. The payments are made directly e to the supplier by drafts/bankers/cheques.

(g) Maintenance of Accounts, Monitoring and repayment: As per the RBI directives, the banks are required to maintain a separate account in respect of each packing credit. However, running accounts are permitted in case of exporters situated in FTZs, EPZs and the 100% EOUs.

Packing credit should be used strictly for the purposes for which it is granted. Hence, the tending bank monitors the use of finance by the exporter. Any of exporters is charged at a higher rate of interest.

The exporter should repay the amount of packing credit out of the export proceeds within the specified period. The use of local funds is not permitted for the repayment of packing credit. Liquidation can also be done from the payment receivable from the Government of India and includes the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or from any other relevant source.

In case the export does not take place for certain reasons then the exporter is required to refund entire amount at a higher rate of interest. Reserve Bank of India (RBI) has allowed some flexibility in this regard, under hi 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.

 

 

 

 

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