Packing Credit, how important in Export business?

 The information provided here is part of Export Import Training course online


Packing Credit – A detailed tutorial in simple language

 

I have briefly explained about Packing credit and its function in International business of Export under separate article in this web blog. I would like to provide you a detailed information about Packing Credit in Export Business in these two articles.  After reading these articles you will learn:

 

The purpose of Packing credit in export business

Who is eligible to get Packing Credit in International Business.

Purpose of releasing Packing Credit to Exporters

How is Packing Credit finance disbursed by bank

Security under Packing Credit finance to Exporters

Margin requirement in Packing Credit under international business

Interest rate of Packing Credit Loans

Importance of Packing Credit to Exporters

Period of allotment of Packing Credit to Exporters

How is limit of packing credit fixed

How to repay and close packing credit finance and

Other mechanism involved in Packing Credit in Export Business.

I hope, you will have a good knowledge about Packing Credit Finance in Export business after reading this article.

 

 

Packing Credit, how important in Export business copyWhat is the purpose of releasing Packing Credit to Exporters?

 

I am going to quote RBI’s slogan about packing credit – ‘NO EXPORT ORDER SHOULD SUFFER FOR WANT OF FINANCE’ – I personally believe this quote says all about the purpose of Packing Credit finance to Exporters.

The basic purpose of Packing Credit Finance is to enable the exporter to procure, process, manufacture or store the goods for export. Packing credit refers to the credit granted by bank to an exporter to enable him to pack the goods. This is short-term working capital advance.

 

What is the eligibility to apply for a Packing Credit by an Exporter?

Any exporter who has a confirmed export order or irrevocable Letter of Credit (LC) can apply for a Packing Credit Loan from his banker. Packing credit loan is sanctioned only on receipt of confirmed export order or irrevocable letter or credit. In the absence of confirmed order or letter of credit, packing credit may be sanctioned by the bank based on the cable provided minimum details of description of goods, quantity, value and name of overseas buyer are available. The regular order or letter of credit has to follow subsequently.

The persons who are eligible for packing credit are Export/Trading/Star Trading /Super Star Trading House or exporter who has received the letter of credit or confirmed export order from the overseas buyer directly and Supplier of goods or supporting manufacture of the export house who has not received the export contract directly but would be executing the contract through the export house. In such an event, he has to produce the letter from the export house or exporter indicating the details of the order received such as description of goods, quantity and value with an undertaking that the export house or exporter would not avail the packing credit to the extent mentioned in the letter. In this case, the export house or exporter and supporting supplier would share the total pre-shipment finance eligible for executing the export order to obtain packing credit.

 

What is the reason to release Packing Credit to Exporters?

The reason of Financing Packing credit is a purpose- oriented advance. The packing credit is made available for the purpose of purchasing raw materials and supplies for manufacturing or producing goods or purchasing goods, processing costs, packing, packaging and warehousing etc. This is short-term advance.

 

Packing Credit Finance is released in what forms?

Pre-shipment finance is both a fund based and non-fund-based advance. Form of packing credit advance is dependent upon the stage of execution of export order. This assumes the form of a loan when the purpose is for purchase of raw materials, manufacture of goods and other incidental costs, prior to shipment of goods. The bank release Packing Credit loan from time to time, based on the request letter of the applicant of packing credit and requirement stage. Non-fund based Packing Credit advance can be in the form of letter of credit, domestic as well as import and issue of various types of guarantee etc.

 

What is the security requirements under Packing Credit?

Packing credit advance can be clean or secured. When the raw materials are not acquired, it can be clean in the initial stages. When the goods are physically possessed and title to the goods is acquired, exporter can pledge or hypothecate the goods to the bank, then the advance becomes secured either in the form of packing credit pledge account or packing credit hypothecation account.

 

What about quantum of Finance in Packing Credit?

There is no fixed formula in respect of quantum of Packing Credit finance. The basic principle is that packing credit advance should be adequate for the exporter to execute the order. Packing credit is, generally, sanctioned the extent of domestic cost of production or FOB value of export order, whichever is lower.

 

Any margin is required to be maintained by Exporter to obtain Packing Credit loan?

There are no fixed norms in respect of margin to obtain Packing Credit loan. However, banks stipulate margin, while sanctioning limits both for fund based and non-fund based. The basic intention of the bank is to ensure business sense and consciousness in the exporter, protect the of banks if erosion happens in the value of goods charged to the bank and not to finance the profit component in the export contract. It is normal that no business firm accepts any contract without profit margin.

 

What is the Period of Packing Credit Finance?

Banks sanction packing credit facility initially, for a period of 180 days, subject to the period involved in production cycle. The exporter may seek sanction of extended period of 90 days in case of circumstances, beyond the control of exporter. Banks normally approve additional period of loan subject to production revalidated export order or letter of credit by the exporter.

 

What is the interest rate under Packing Credit finance to Exporters?

Banks have to charge concessional rate of interest on the packing credit to make the export products, globally competitive. As per the directives of RBI, the rate of interest charged on packing credit has to bear relationship with the prime-lending rate. Each bank fixes its own prime-lending rate. Banks are gives the freedom to charge the rate of interest to make the interest rate competitive. Interest rate for the first 90 days will be cheaper, while the next 90 days will be still higher. Extended period of credit of 90 days carries more interest rate than the rate charged earlier. However, the interest rate of the bank has to be lower than the prime-lending rate of that bank. Banks are not allowed to charge any other service charges other than those stipulated by Foreign Exchange Dealers’ Association of India. However, premium payable to ECGC has to be borne by the exporter. What is ECGC and functions of ECGC have been separately written by me in other articles in this web blog.Click here to continue reading - How to get Packing Credit Finance sanctioned? How to repay and close Packing Credit Loan availed? Running account of Packing Credit, an easy method for Exporter and Banker, Packing Credit under Red Clause Letter of Credit.


 The above information is a part of Import Export Training course online


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Comments


Mallikarjun S: Good and helpful article.

neymar: it is a very useful article on packing credit.

NAZIR: Dear Sir, Is Packing credit available with service sector in EPC contract in Kuwait. We dont procure material locally. Thanking You, Nazir

ayaz kazi: Sir, i have established a export new comapany and has got the purchasre order(confirm) from importer. and central bank is not providing preshipment finance on it. what should i do.

AL TOUSIFF : My self Shaik Tousiff Hussain, and iam running an Minerals based export Company . I'm unable to understand how to get PCFC without security.All the banks are asking for security for any type of loan I approach them. I started my business in 2013 and doing Export orders on the basis of Irrevocable LC 100% at Sight. Is it possible to get PCFC for such orders without security.? If so, how to proceed.? I am taking LC with a LC period of 45 to 60 days where for me it requires atleast 30 to 40 days to execute such orders. How much time does it takes to get PCFC sanctioned.? Please help me with the above

Metroengtech: Great list!! Thanks for sharing..Great post, thanks for sharing .if you want to get Packing Manufacturer in Delhi in India http://www.metroengtech.com/

Ethiraja B: Good Article. Easy to understand

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