Pre-shipment Finance

Posted on 28 April 2023 Category : How to export

Pre-shipment Finance

If the exporter is in need of finance to execute the export contract, he has to make, arrangements for securing necessary finance, well in advance. Now-a-days, banks extend financial assistance liberally, at concessional interest rate. Under the export credit (interest subsidy scheme), the RBI enables the commercial banks to extend pre-shipment credit in the form of packing credit and post-shipment credit, both at concessional interest rates. Pre-shipment credit is given to an exporter for purchase of raw materials, processing them and conveting them into finished goods for the purpose of exports. The purchasing, processing and packing of goods for export are facilitated by packing credit facility. This facility is accorded on the basis of either letter of credit or the confirmed export order or any other evidence of the export order. Parking credit, at the time of disbursement for purchase, is unsecured as banks may not insist upon any margin. So banks, generally, insist on some collateral Security either in the form of immovable property or, atleast, a good third party guarantee. After goods are purchased by the exporter, they stand hypothecated to the bank. Banks obtain letter of hypothecation of goods, invariably, at the time of sanction of credit facility. When packing credit facility is sanctioned by the bank, they affix a rubber stamp on the export order/letter of credit with the words reading "Export finance granted". The purpose is to avoid duplicate financing. Packing credit loan is disbursed in installments, depending on the requirements and progress of production schedule. This packing credit loan account gets closed as and when exporter negotiates the bill through the same bank. Bank obtains an undertaking from the exporter that the export bill shall be negotiated through that bank only to facilitate closure of packing credit loan account.

Banks also sanction post-shipment credit to bridge the gap between the shipment of goods and realisation of sale proceeds. Exporter can secure sanction of interest-free credit against duty drawback. The greatest advantages are interest free element on credit and release of funds blocked in the form of customs duty and excise duty incidence on the inputs. The interest free credit is for a period of 90 days. This credit is given to exporter against duty drawback claim, which is pending scrutiny, sanction and payment. This scheme is applicable only if excise duty has been determined on All Industry Rates or Brand Rate basis.

A good bank goes a long in the way of successful execution of the contract, in particular, to a new exporter as unexpected contingencies may come up demanding additional financial assistance, more so, timely sanction is the most important requirement as shipment has to be made before the stipulated date, otherwise letter of credit would not be valid for negotiation of documents.

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