Pre Shipment Finance
Pre shipment finance may be classified as
- Packing Credits
- Advances against receivables from the government like duty drawbacks etc
- Advances against cheques / drafts received as advance payments
Packing Credit
- Pre shipment finance is generally known as packing credit
- Essentially a working capital advance made available for the specific purpose of procuring/processing/manufacturing of goods meant for exports
- All advances under packing credit need to be liquidated from the export proceeds
Regulations to be complied by a commercial banker at the time of appraising an export credit
- Under FEMA (Exchange Control Regulations)
- Exporter should be a regular customer, bona fide exporter and have a good standing in the market
- Exporter should not be under the caution list of RBI
- Under Foreign Trade Policy (2009-2014)
- Exporter should have an IEC number
- Goods must be freely exportable or if restrictive, should have a valid license for allowing the export
- Country with which the exporter is dealing is not under trade barrier list
- Under Export Credit Guarantee Corporation (ECGC)
- Party to whom the bank proposes to extend facility is not under the Specific Approval list of ECGC
- Countries to which the exporter wants to deal should not be under the restrictive cover countries (RCC)
- Limit proposed to be sanctioned should be within the discretionary limit prescribed by ECGC per borrower for the bank
- All sanctioned limits to be reported to ECGC within 30 days in the prescribed format
Disbursement of packing credit advance
- Disbursing bank ensures that proper documents have been executed by the exporter
- Exporter should submit following documents at the time of availing Packing credit
- Formal application for releasing packing credit with the undertaking to the effect that the exporter would ship the goods in the stipulated due date and submit the relevant shipping documents to the bank within the time limit
- Firm order of Letter of Credit or original correspondence between the exporter and importer
- DGFT licence if the export falls under restrictive list
- Bank will scrutinize application and the details submitted by the exporter. Particulars recorded in the Packing credit register by the bank include
- Name of the buyer
- Commodity to be exported
- Quantity
- Value of export
- Last date of shipment
- Any other relevant term
- Quantum of finance is fixed on FOB value of the contract or the LC value whichever is lower. Advances against insurance & freight charges are considered later when the consignment is ready
- Under some cases, packing credit advance may be more than LC or contract value (e.g. incentives by the govt to export when market prices are more or there are by products formed during the production process like oil or oil cakes that get sold)
- Disbursements are made in stages and in cheques/drafts
- Packing credit advances may be given for different durations depending upon the process of procurement, manufacturing and export, and it is bank’s discretion, but normally doesn’t exceed 180 days
- The duration may be extended by the bank after necessary procedures, but any extension beyond 365 days needs ECGC approvals
In view of the concessional rate of interest, banks must ensure the end use of funds is for genuine export purposes only
Follow up on packing credit advances
- Submission of stock statements
- Physical inspection of stocks by the authorized dealer at regular intervals
- Payment of ECGC premium on a monthly basis
Liquidation of packing credit advances
Advances are liquidated by the export proceeds. For any reason, if export doesn’t take place, all the entire advance will be recovered at commercial rate plus penal charges as decided by the bank. An overdue report of advance should be made to the concerned regional branch/office of ECGC in prescribed format within 30 days
Packing Credits to Sub supplier
Packing credit may be made available to the manufacturer of goods who is supplying to Export Order Holder (EOH), if the EOH states that he has not availed any credit facility against the concerned portion of the order. The banker to EOH may open inland LC specifying the goods to be supplied by the sub supplier to EOH as a part of the export transaction. On the basis of such an LC, the sub supplier’s bank may grant export packing credit to the sub supplier.
Once the sub supplier makes available the goods as per inland LC terms to the EOH, his obligation of performance under the scheme will be treated, as complied with and penal provisions will not be applicable to him for delay if any
Since the sub supplier is not liable for any penal provisions for the delay by EOH, the financing bank of the sub supplier, before extending the credit facilities should make discreet enquiries to confirm the track record of the EOH.
Packing Credit facilities to deemed exporters
Deemed exports involving supplies made to IRD/IDA/ADB or any multilateral funds and programmes, under orders secured through global tenders for which payment 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 consultancy services
In the case of consultancy services, export will not involve in physical movement of goods out of Indian customs territory. In such cases, pre shipment finance at concessional interest rate can be extended to the exporters to enable them to undertake preliminary arrangements such as mobilizing technical personnel and other staff and training them.
Advances against cheques/drafts received as advance payments
If an exporter receives either a cheque or a draft representing advance payments towards future exports, and in case if a bank advances funds against the security of such instruments, this advance will be treated as export finance and only concessional interest rates would be charged.
Directorate General Of Foreign Trade | Ministry Of Commerce And Industry | Government Of India,Trade 