Pre-shipment finance plays a crucial role in international trade, especially for exporters. This financing helps in purchasing raw materials, paying for labor, and packing of goods and overseas transportation expenses of export order. Let’s dive into the details:
What is Pre-Shipment Finance?
Pre-shipment finance refers to the credit extended to the exporters in procuring the raw materials for manufacturing, packaging and sale of goods in international market.
Pre shipment finance in exports is also referred to as packing credit.
It’s short-term finance, while repayment is done once the buyer pays for the exported goods.
under what payment terms pre-shipment export financing is required?
The exporter has to arrange for export finance if the agreed payment terms are an open account, documentary collection and a letter of credit. It is only in the payment in advance where the exporter need not arrange the Pre-shipment finance.
What is the credit limit in Pre-shipment export finance?
Export finance facility is based on the principle of need-based financing principle. The quantum of export finance cannot be more than the amount, mentioned in the irrevocable L/C for export order.
How is the packing credit disbursal done by the banks?
The export packing credit disbursal is made in stages. The banks may release the pre shipment export credit in one lump sum or in stages as per the requirement of an exporter.
The amount of credit is fixed depending on the FOB value of product Or value of irrevocable LC, or the domestic value of goods, whichever is found to be lower. The Banks disburse the amount of credit through check or draft. Banks do not pay in cash to the supplier of raw material or to the exporter directly.
What is the duration of packing credit given by the banks to the exporter?
The bank usually decides the duration of packing credit based on the export cycle or manufacturing cycle of the product. As for the RBI, guidelines the maximum period of packing credit period in India is 180 days. However, the bank is authorized to use their discretion in providing a further 90 days extension in packing to the exporter on their satisfaction.
RBI directives mandate that if Pre-shipment advances are not adjusted by the submission of export document within 360 days from the date of advance, the advances will cease to qualify for the concessive rate of interest from the date of grant of such export credit.
What are the factors that banks consider before sanctioning pre-shipment export credit ?
- Credit worthiness of the exporter.
- Operating profit margin of the exporter.
- The nature of order, whether long term or short term.
- The nature of commodity, including cyclical patterns of supply and demand.
- The capability of exporter to realize the export proceeds from the importer, including risk bearing capacity.
- The exporter should have the necessary licenses and permits as mandated in schedule two of the ITC(HS) classification for export.
- The country to which exports are done should not be under international sanctions for transfer of funds
When does the exporter need pre-shipment finance?
- The export firm extends the credit to its buyers after shipping the goods and grants them extended payment terms. The exporter now requires short term financing until the payment is received from such buyers.
- If the export firm has to pay to suppliers upfront for an order to procure the raw material or semi processed goods are finished goods which are intended for international sales.
- The need for export financing is to improve the cash flow, when there is a concern about the customers creditworthiness.
- The exporter requires funds in order to conduct market study, feasibility analysis for its products and services in international markets.
- The need for export credit depends on the nature of export orders such as capital goods Where large amount of funds are required.
what is the Eligibility criteria for granting packing credit to the exporter?
The mandatory requirements of due diligence for extending export credit by banks are-
- The Exporter should have a bank account with an authorized dealer in foreign exchange, in compliance with the RBI and FEDI rules and procedures.
- The exporter should have an IEC code issued by DGFT or regional authority.
- The exporter should have RCMC issued, from the concern EPC or commodity board or export development authority.
- If the exportable goods do not fall under any export promotion bodies, he or she should get registered with federation of Indian exporter organization( FIEO ).
- Service exporters are required to get registered with service export promotion council.
What are the other factors that banks examine while granting Pre-shipment credit to an exporter?
- The exporter should submit the relevant shipping documents to the banks within the prescribed time limit, such as bill of lading or airway bill.
- The exporter should have a confirmed export order with a negotiable business contract from the buyer or have an irrevocable LC issued in his favor by a foreign bank at the request of the importer.
- If the export order is in the name of two parties, wherein the first is a main supplier and the 2nd is sub supplier, banks in India have been authorized to provide the export credit on the basis of shared percentage of export order between the two or more than two exporters.
what are the Interest rates for pre shipment packing credit under rupee?
The packing credit or the pre shipment finance to Indian exporter is available in both Indian rupee and foreign currency. The base rate system has been introduced by RBI, with effect from 1 July 2010.
The RBI circular on export credit makes it clear that if pre-shipment export credit is not liquidated from proceeds of bills on purchase, discount and so on, the submission of export documents within 360 days from the date of advance, such export credit given to the exporter, seizes to qualify for concessional rate of interest.
The applicable rate of concessional or preferential interest for lending on export credit is given in the below table.
| Pre- Shipment credit in Indian rupee | from the date of advance. | applicable Interest rate |
|---|---|---|
| 1. | If Packing credit period from date of advance is 180 days. (maximum period of packing credit period in India is 180 days) | Base rate or concessional rate |
| 2. | If the banks provide a further 90 days extension in packing credit to the exporter on their satisfaction, up to 270 days from date of advance. | Base rate or over and above base rate. |
| 3 | If Pre-shipment export credit is not liquidated from proceeds of bills on purchase or discount on submission of export documents within 360 days from date of advance. | Such export credit seizes to qualify for concessional rates of interest. Interest rate is above Base rate |
| 4. | If the packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanction. But within a period of 360 days from the date of advance, the exporter would be Eligible for concessional rate only up to the sanction period. | For the balance period, the exporter will have to pay interest rate prescribed under the category Export Credit Not Elsewhere specified.(ECHNOS). |
| 5. | In cases where exports do not take place within 360 days from the date of pre shipment advance and such credits will be termed as ‘Export Credit Not Elsewhere Specified'(ECHNOS). | Banks are free to charge interest rate as prescribed under ECHNOS category. |
| 6. | If exports do not take place at all, | Banks should charge on relative packing credit domestic lending rate plus penal rate of interest. |
Pre- Shipment credit in foreign currency:
Due to increased pressure on India’s foreign exchange reserves, banks are made free to charge the interest rates as per the economic interest. No ceiling rates on the pre shipment in export credit in foreign currency are applicable for any banks however, applicable interest should be fixed with reference to ruling London Interbank offer rate (Libor) Euro Libor or Euro Interbank offer rate.(EURIBOR)
Running Account Packing:
Disbursal of the packing credit is done after the confirmation of export order and submission of the export documents. Sometimes, an exporter may not have got the confirmed order but is under the anticipation of getting it on coming festival, such as Christmas Holi and id-ul- fitr and need finances to keep his goods ready by the time order comes in. Under such circumstances, RBI has allowed banks in India to provide a special packing credit facility known as Running account packing.
Banks specifically check for the following particulars while processing the running account facility to the exporter.:
- Name of the buyer
- Commodity to be exported.
- Quantity.
- Period of credit.
- International demand for the product.
- Value either CIF or FOB
- Last state of shipment or collection or negotiation.
- Any other terms to be complied with.
Follow up Of packing credit advance:
Banks hypothecate the stock of the exporter and the exporter is required to submit stock statement providing all necessary details about stocks. Banks use such stock as guarantee for securing the pre shipment export credit in advance. Banks also physically inspect the stock at regular intervals at the premises of exporter.
Liquidation of packing credit advance:
Pre-shipment export credit has to be liquidated after the submission of export bills by the exporter or alternatively on the realization of export proceeds of relevant shipment.
The liquidation of pre shipment export credit can also be done by the payment receivable as export benefits incentives subsidies from GOI . In India the export benefits or incentives or subsidies are received from GOI include the duty drawback, duty credit script under MIES or SEIS. the payment under the “interest equalization scheme” export assistance under the MDA of the central government or from any other relevant source..
If the exporter has failed to make the export and export cannot take place due to the cancellation of the order, banks are authorized to recover the entire advance from the exporter along with a certain interest rate.
In some cases, the RBI Master Circular allows some flexibility in use of packing credit whereby the exporter is allowed and permitted to substitute the exportable commodity. Thus, pre shipment export finance can be repaid by export proceeds of another commodity, which can be exported to the same or another buyer.
This is to be done with the prior approval and satisfaction of banks, where market circumstances have compelled the exporter to do so, or the exporter has a good track record or is a long standing client of the bank with good reputation.