PRE SHIPMENT FINANCE IN INTERNATIONAL TRADE

Posted on 29 April 2023 Category : For Beginners

PRE SHIPMENT FINANCE UNDER IMPORT AND EXPORT

PRE shipment finance is financial assistance extended to the exporter before the shipment of goods and post – shipment finance is concerned with the financial assistance extended after shipment of goods.

Classification of Pre-Shipment of Finance:

(A) Packing Credit

(B) Advances against incentives receivable from Government

(A) Packing Credit The basic purpose 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 a short-term working capital advance. The salient features of the scheme are:

1. Eligibility Criteria: Packing credit loan is sanctioned only on receipt of confirmed export order or irrevocable letter of credit. The persons who are eligible for packing credit are:

(a) 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

(b) 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/exporter indicating the details of the order received such as description of goods, quantity and value with an undertaking that the export house/exporter would not avail the packing credit to the extent mentioned in the letter. In this case, the export house/exporter and the supporting supplier would share the total pre-shipment finance eligible for executing the export order. In the absence of confirmed order/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.

2. Purpose of Finance: Packing credit is a purpose-oriented advance. This 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 k warehousing etc. This is a short-term advance.

3. Form of Finance: Pre-shipment finance is both a fund based and non-fund-based advance. Form of 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, will release loan from time to time, based on the request letter of the applicant of packing credit and requirement stage. Non-fund based advance can be in the \rti form of letter of credit, domestic as well as import and issue of various types of grantee etc.

4. Security: Packing credit advance can be clean or secured. When the raw materials are not acquired, it can he 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.

5. Quantum of Finance: There is no fixed formula in respect of quantum of finance. The basic principle is that, packing advance should he adequate for the exporter to execute the order. More so, the guidelines of RBI, in this context, are that no export order should suffer for want of finance. Packing credit is, generally, sanctioned to the extent of domestic cost of production or FOB value of export order, whichever is lower.

6. Margin Requirement: There are no fixed norms in respect of margin. How cover, 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 interests of bank 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.

7. Period of Finance and Interest Rate: 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 of revalidated export order or letter of credit by the exporter. 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. The prime-lending rate of interest also changes from time to time. Banks are given 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.

8. Sanction of Packing Credit Limit: In order to avail packing credit facility, exporter has to submit formal application along with the necessary documentary proof. Exporter is sanctioned a regular packing credit limit based on the assessment of the bank in respect of the credit needs of the exporter. For every export order, a separate packing credit loan account is opened for proper monitoring. At the time of sanction of packing credit loan, bank obtains an undertaking from the exporter that the documents covering shipment of goods, for which packing credit is sanctioned, will be negotiated through that bank and packing credit account will be closed with those proceeds. Further, exporter also undertakes to deposit any receivable from Government such as duty drawback into the account. Disbursal of loan will be made, in installments, depending on the schedule of production and other requirements.

9. Closure of Packing Credit Loan: Normally, packing credit account gets closed with the realisation of sale proceeds of export order. After the shipment of goods, balance in packing credit loan account will not be allowed to continue. If the exporter is not able to make shipment of goods for one reason or other, bank charges higher rate of interest on such loan. If any balance remains in the packing credit account, after shipment of goods and negotiation of bill, such excess balance will be transferred or converted to another loan account and the advance will be treated as post-shipment finance. This type of transfer or conversion into a separate loan account is necessary to ensure compliance of ECGC guarantee.

10. Running Account Facility: RBI permits banks to sanction running account facility even in the absence of firm order/letter of credit, subject to the following conditions:

(a) Need for running account facility has to be established by the exporter to the satisfaction of the bank.

(b) Banks extend this facility only to those exporters whose track record is free from blemishes.

(c) L/C or firm order is to be submitted to the bank within a reasonable period. However, in respect of commodities covered under selective credit control commodities, banks have to insist on submission of the above documentary proof within one month from the date of sanction

(d) The concessional credit facility, available to the exporter, should not exceed 180 days.

11. Packing Credit under Red Clause L/C: In this method, credit is given at the risk and responsibility of the foreign bank establishing the letter of credit. Packing credit advance may remain unsecured in character till the exporter is in a position to offer security, in the form of hypothecation of the goods purchased.

(B) Advances against Incentives receivable from Government Generally, incentives receivable from Government of India are sanctioned at post-shipment stages. However, bank sanctions these advances, under exceptional circumstances, when the production cost of export order is more than the FOB value of the contract as Packing credit is sanctioned only to the extent of the minimum of the two. In this case, the advance is sanctioned against the duty drawback subject to the condition that the loan is covered under Export Production Finance Guarantee of ECGC. These advances are to be repaid from the proceeds of shipment and receipt of incentives from Government. This loan also carries the concessional rate of interest from the bank as packing credit loan. Premium payable to ECGC has to be borne by the exporter.

(C) Pre-Shipment Credit in Foreign Currency This is an additional window to rupee packing credit scheme. This will enable the exporter to import the required raw materials for executing the export contract. This credit is available in all foreign currencies. For this, exporter cannot get sanction without producing confirmed export order/irrevocable letter of credit. This advance is self-liquidating in nature, with negotiation of export bill.

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