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 is 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.
Preshipment finance is extended in the following forms:
- Packing Credit in Indian Rupee
- Packing Credit in Foreign Currency (PCFC)
Requirment for Getting Packing Credit
This facility is provided to an exporter who satisfies the following criteria
- A ten digit importerexporter 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 Licence), 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 release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date 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.
- 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.
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.
Eligibility
Pre shipment credit is
only issued to that exporter who has the export order in his
own name. However, as an exception, financial institution can
also grant credit to a third party manufacturer or supplier of
goods who does not have export orders in their own name.
In this case some of
the responsibilities of meeting the export requirements have
been out sourced to them by the main exporter. In other cases
where the export order is divided between two more than two
exporters, pre shipment credit can be shared between them.
Quantum of Finance
The Quantum of Finance
is granted to an exporter against the LC or an expected order.
The only guideline principle is the concept of NeedBased
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.
Different Stages of Pre Shipment Finance
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. To check all
these information, banks can seek the help of institution like
ECGC or International consulting agencies like Dun and Brad
street etc.
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.
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 provide 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,
- Quantity,
- 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.
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 this stocks.
Apart from this,
authorized dealers (banks) also physically inspect the stock
at regular intervals.
Liquidation of Packing Credit Advance
Packing Credit Advance
needs be liquidated out of as the export proceeds of the
relevant shipment, thereby converting preshipment credit into
postshipment credit.
This liquidation can
also be done by 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 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.
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.
Special Cases
Packing Credit to Sub Supplier
Packing Credit can only
be shared on the basis of disclaimer between the Export Order
Holder (EOH) and the manufacturer of the goods. This
disclaimer is normally issued by the EOH in order to indicate
that he is not availing any credit facility against the
portion of the order transferred in the name of the
manufacturer.
This disclaimer is also
signed by the bankers of EOH after which they have an option
to open an inland L/C specifying the goods to be supplied to
the EOH as a part of the export transaction. On basis of such
an L/C, the subsupplier bank may grant a packing credit to the
subsupplier to manufacture the components required for
exports.
On supply of goods, the
L/C opening bank will pay to the sub supplier's bank against
the inland documents received on the basis of the inland L/C
opened by them.
The final
responsibility of EOH is to export the goods as per
guidelines. Any delay in export order can bring EOH to penal
provisions that can be issued anytime.
The main objective of
this method is to cover only the first stage of production
cycles, and is not to be extended to cover supplies of raw
material etc. Running account facility is not granted to
subsuppliers.
In case the EOH is a
trading house, the facility is available commencing from the
manufacturer to whom the order has been passed by the trading
house.
Banks however, ensure
that there is no double financing and the total period of
packing credit does not exceed the actual cycle of production
of the commodity.
Running Account facility
It is a special
facility under which a bank has right to grant preshipment
advance for export to the exporter of any origin. Sometimes
banks also extent these facilities depending upon the good
track record of the exporter.
In return the exporter
needs to produce the letter of credit / firms export order
within a given period of time.
Preshipment Credit in Foreign Currency (PCFC)
Authorised dealers are
permitted to extend Preshipment 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 Interbank Offered Rate (LIBOR).
According to guidelines, the final cost of exporter must not
exceed 0.75% over 6 month LIBOR, excluding the tax.
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(NonResident) Accounts.
Banks are also
permitted to utilize the foreign currency balances available
under Escrow account and Exporters Foreign Currency accounts.
It ensures that the requirement of funds by the account
holders for permissible transactions is met. But the limit
prescribed for maintaining maximum balance in the account is
not exceeded. In addition, Banks may arrange for borrowings
from abroad. Banks may negotiate terms of credit with overseas
bank for the purpose of grant of PCFC to exporters, without
the prior approval of RBI, provided the rate of interest on
borrowing does not exceed 0.75% over 6 month LIBOR.
Packing Credit Facilities to Deemed Exports
Deemed exports made to
multilateral funds aided projects and programmes, under orders
secured through global tenders for which payments will be made
in free foreign exchange, are eligible for concessional rate
of interest facility both at pre and post supply stages.
Packing Credit facilities for Consulting Services
In case of consultancy
services, exports do not involve physical movement of goods
out of Indian Customs Territory. In such cases, Preshipment
finance can be provided by the bank to allow the exporter to
mobilize resources like technical personnel and training them.
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.
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