EXPORT FINANCE - PRE-SHIPMENT CREDIT
Exporters, once they receive export orders, will be generally looking for financing options, at competitive interest rates, in order to execute the orders. While on one hand, they require funds for procuring raw materials, processing, labour payments, packing, storage, etc., on the other hand if the export orders are on credit terms (usance), they would require funds to bridge the gap between shipment of goods till payment is received from the buyer on due date.
We will discuss the first stage of financing to the exporter, i.e. Pre-shipment credit in this chapter.
As a part of working capital finance, pre-shipment finance is granted to the exporters by bank or a financial institution, to enable exporters to :
Procure raw materials
Carry out manufacturing processes
Warehousing of goods and raw materials
Processing and packing of goods
Arranging shipment of goods to the buyers
Meeting other costs of the business, until shipment is made.
4.2.1 TYPES OF PRE-SHIPMENT FINANCE
Packing credit for purchase of raw material, processing and other incidental expenses
Advances against receivables from government, like duty drawback, etc.
Advance against cheques/drafts etc., representing Advance Payment.
EXPORT FINANCE - PRE-SHIPMENT CREDIT
Pre-shipment finance is extended in the following forms:
Packing Credit in Indian Rupees (EPC/PCL)
Packing Credit in Foreign Currency (PCFC)
4.2.2 PACKING CREDIT LOANS (PCL)/EXPORT PACKING CREDIT (EPC)
In an Indian scenario, this facility is provided to an exporter who generally satisfies the following criteria:
The prime criterion for availing export credit is to have a confirmed order or an export letter of credit, which substantiates that the exporter has an order in hand and needs funds to execute the same. This requirement may be postponed for submission at a later date, for established exporters, units in SEZ, etc., under the Running Account facility that may be granted to them.
However, export packing credit can also be granted to manufacturers or suppliers of goods, who themselves do not export, but supply goods to merchant exporters who hold export orders or Letters of Credit in their name. Such manufacturers are known as sub-suppliers.
Exporter should have Importer-Exporter Code (IEC) number issued by DGFT.
Exporter should not be in the caution list of RBI.
Exporter should not be in the Specific Approval List of ECGC
If the goods to be exported are not under freely permissible category as per extant Foreign Trade Policy, the exporter should have the required authorisation/quota permit/license issued by DGFT to export such goods.
Past Track record, past export turnover, financial strength of the entity and the availability of security would also play important role in getting export credit limits sanctioned.
Besides, the exporter in his request letter must undertake to make the shipment as per the shipment schedule given in the order and submit export documents, including documents of title to goods and customs declaration forms, to the bank within the stipulated time.
4.2.3 QUANTUM OF FINANCE
The quantum of finance would depend upon two aspects – the total limits sanctioned to the exporter, the terms and conditions of the sanction as also the value and terms of the confirmed order or the LC received by the exporter. While there is no fixed formula to determine the total quantum of finance that is granted to an exporter and it is generally taken to be a need based amount, the total limits sanctioned would largely depend upon the past track record, current turnover, projected export sales, orders in hand, capacity available with the exporter and security available in the account. Also, the quantum of finance against each order or LC would depend upon the nature of payment terms and margin stipulated by the bank. The percentage of margin stipulated is generally dependent upon the following:
The nature of order - Sight or Usance
The nature of the commodity - perishables would have higher margin
The capability of exporter to bring in the requisite contribution - own contribution.
Moreover, pre-shipment finance is granted based on the FOB value of the order and if the order/LC is on CIF terms, notional value for freight (10%) and insurance (1%) is deducted while calculating the eligible value for disbursement of loan against the order.
4.2.4 STAGES OF PRE-SHIPMENT FINANCE
(a) Sanction of limits
Pre-shipment finance or Packing Credit is essentially a working capital advance made available for the specific purpose of procuring/processing/manufacturing of goods meant for export. All costs prior to shipment would be eligible for being financed under the packing credit. While considering credit facilities for export activities, banks specifically look into the aspects of exporter’s profile, products to be exported, countries to which exports are intended, etc. The Bank would consider to sanction Packing Credit limits after ensuring the following aspects:
(a) The exporter is a regular customer, a bonafide exporter and has a good standing in the market.
(
b) The exporter has the necessary licenses and quota permits, for manufacturing, trading or for exports of goods, if any are required.
(
c) Countries to which exports are intended and if they are under the list of Restricted Cover Countries (RCC). In case shipments are made to a buyer in some of the countries classified by ECGC as restricted cover countries, while specific approval of ECGC is required to be taken to cover such shipments under the ECGC policies, banks may not allow finance against such shipments, considering their internal policies.
(
d) The past financials of the exporter, projected balance sheet, past track record of exports, orders in hand, as also aspects relating to security of advance, including collaterals, guarantees and availability of ECGC cover are taken into consideration while sanctioning the credit limits. Also, stipulation of margins, i.e. stake to be brought in by the exporter, would depend upon the profit margin as also the overall strength of the proponents. While the limits are usually sanctioned for a period of one year, the maximum tenor of packing credit loans, would depend upon the manufacturing or business cycle of the exporter and would differ from exporter to exporter and commodity to commodity.
Bankers usually apply and look into 5 C’s (principles of lending) of the borrower i.e. Capacity, Character, Capital, Conditions and Collateral, besides transaction related aspects.
(b
) Disbursement of Packing Credit
After sanction of limits and execution of the security documents, the limits are set up in banks system, ready for disbursal.
(i) Process of disbursement:
Packing Credit Loan is not like an Overdraft or Cash Credit limit and cannot be drawn down with a cheque book facility. It is transaction related credit and is disbursed as a separate loan within the overall sanctioned limits, each time the customer requires and requests for the same. The main requirement is availability of confirmed export order or an Export LC with the exporter.
Thus, for each disbursement, the exporter has to provide a request letter and a copy of confirmed order or Export LC, for the bank to check following information:
(
(
(
(
(
(
EXPORT FINANCE - PRE-SHIPMENT CREDIT
a) Name of Buyer and country of export.
b) Commodity to be exported.
c) Quantity.
d) Value (either CIF or FOB).
e) Last date of shipment and last date of negotiation.
f) Any other terms to be complied with.
Packing credit is always allowed on the FOB value of contract/LC or the domestic value of goods, whichever is lower. As such, if the contract or order is with a different INCOTERM, say, on CIF basis, notional value of freight and insurance is deducted out of CIF value, to arrive at the FOB value for computation of eligible amount of packing credit loan that can be disbursed against the given order.
The bank also looks into the status report of the prospective buyer with whom the exporter proposes to do business and from whom he has received the export order. Status report on the buyer can be obtained from ECGC or any other agencies like Dun & Bradstreet, to establish the genuineness, track record and financial capacity of the buyer.
For each disbursal, a separate notional loan account is opened by the bank, to monitor the due date and shipment related aspects. Disbursal can be made by way of making payment directly to the suppliers of raw material or by credit to the current account of the exporter. Wherever payments are released to the credit of current account of the exporters, end use monitoring has be ensured. Example: To understand the guidelines and practices relating to pre-shipment credit, let us go through an example.
A Ltd., which is a manufacture of furniture, has domestic and export sales, with a turnover of Rs. 20 crore last year, Rs. 9.50 crore being from exports. The company enjoys a working capital credit limit of Rs. 5.00 crore with Bank ABC, Mumbai.
The limits are divided as follows;
Total facilities: Rs. 5.00 crore
Sub-limit:
Cash Credit (Rs. 3.00 crore)/Export Credit limits (Rs. 3.00 crore)
EXPORT FINANCE - PRE-SHIPMENT CREDIT
Out of Export Credit limits Rs. 3.00 crore
Packing Credit in INR/FC (Rs. 2.00 crore)-20% margin
Post-shipment in INR/FC (Rs. 2.00 crore)-10% margin
BG/LC within above Rs. 1.00 crore
Forward Contract limits within overall limit – Rs. 10.00 crore – 5% to be considered for limit purposes.
Now A Ltd. received order for USD 100,000 from B in Hongkong, the order is on CIF Basis.
A approaches bank to release packing credit in INR against this order.
The Bank, will arrive at the amount to be disbursed as under:
of CIF Order - C onsidering U S D/ INR at 80.00
The bank will then, permit finance of Rs. 56,00,000, within the limits available for packing credit and overall limits, by creating a sub-account for this packing credit loan. The due date for this will be calculated separately for monitoring the advance and allowing of concessional interest rate and also passing Interest Equalisation Scheme benefits to the exporter, as per GOI/RBI guidelines.
(
c) Tenor of Packing Credit loans
While the maximum period of packing credit loan - based on manufacturing or business cycle - is decided at the time of sanction of facilities, the tenor of individual packing credit loan is decided on the basis of last date of shipment, as evidenced in each order or contract, plus 21 days to submit the relative export bill or the maximum period as per sanction, whichever is earlier.
To take an example, if the limits are sanctioned for a maximum period of 180 days and the order states shipment within 100 days from the date of order. If the exporter comes to bank, say after 10 days from the date of order, the bank
EXPORT FINANCE - PRE-SHIPMENT CREDIT
would allow 90 plus 21 days, i.e. a total of 111 days from the date of release of loan, against this order. As against this, if the limit is sanctioned for 120 days, and the order states shipment within 150 days from the date of order, which is 1.1.2023, and the exporter comes on 11.1.2023, to avail packing credit, the bank would allow loan for a maximum of 120 days from 11.1.2023.
Packing credit limits are normally granted for a tenor required by the exporter for procuring, processing of raw material, i.e. manufacturing cycle or business cycle. Banks usually grant loan upto a maximum tenor of 90/180 days, based on their assessment. However, in case of need, banks may grant extension of packing credit loans for a further period upto 270 days or 360 days.
In case of a packing credit, extended for a maximum period of 360 days as an exceptional case, the same needs to be liquidated by allowing post-shipment finance against the export bill lodged or any other export proceeds latest on the 360th day. If the packing credit is not liquidated on 360th day, it loses its status as an export credit and ceases to get concessional finance and other benefits ab initio, i.e. from day one (the date of release of packing credit). Even the interest subsidy/subvention or benefit of equalization received under any of the Government schemes, if any, needs to be recovered from the exporter and repaid to the government.
(
d) Running account Facility
Banks may grant the facility of allowing packing credit without the need to prior submission of the order/letter of credit at the time of availing packing credit. This facility can be allowed to exporters with good track record, units in SEZ, Status Holder Exporters, etc., irrespective of the commodity. Such exporters are required to submit the copy of relevant confirmed order or letter of credit within a reasonable period, say 30 days from the date of availing packing credit. The concept adopted here is that the businesses and manufacturing plants are running businesses and there may be a gap in procuring or finalization of orders, during which time the plants may continue manufacturing and not face difficulty or shortage of working funds.
Adjustment of packing credit allowed under running account facility is done on FIFO basis, i.e. the first availed packing credit will get adjusted by the first export bill submitted or first payment received.
(e) Substitution of Order
Packing credit is generally given against confirmed order or letter of credit received by the exporter. After availing packing credit by submission of an order, if the exporter is unable to ship the goods under the given order but is ready for shipment of goods for another order, he has an option to provide that other order to the bank and substitute the order given earlier. This facility is allowed for order based packing credit. In case of running account facility, the adjustment of packing credit is on FIFO basis. Thus, the order is merely a requirement to show that the exporter has an export order and that the packing credit which was provided is being used for manufacturing/procuring export related goods only.
(f) Follow up of Packing Credit Advance
The primary security for packing credit loans is the raw material, work in progress and the finished goods held by the exporter against which the packing credit has been availed. Thus, the exporter is required to maintain proper records of goods received, those under process and finished goods and submit a monthly/quarterly stock statement to the bank. The value of stocks, as per the statement, must not be less than the amount of packing credit granted plus the margin stipulated.
Banks also carry out physical verification of stocks which are hypothecated or pledged, by carrying out regular inspections.
(
g) Liquidation of Packing Credit Advance
Once goods are shipped, the exporter is supposed to submit the export bill to the bank informing the bank of the packing credit availed against this bill. Packing credit allowed against the shipment is ideally to be liquidated by allowing post shipment finance in the form of purchase/discounting/negotiation of export bill.
Packing credit advance can also be liquidated with proceeds of another export bill or advance payment received against another order, where no packing credit has been granted by the bank. It can also be adjusted out of funds received from government agencies/departments against in the form of drawback, Market Development Assistance fund, etc.
As a specific dispensation and subject to mutual agreement between the bank and the exporter, packing credit can also be adjusted out of foreign currency
EXPORT FINANCE - PRE-SHIPMENT CREDIT
balances held in EEFC account or Rupee balances held in current account of the exporter, up to the extant exports have actually taken place, i.e. bank is satisfied that the balances relate to the credits from exports. For any reasons, if the export does not take place at all, the entire advance is recovered at commercial interest rate plus a penal rate as may be decided by the bank.
RBI has allowed some flexibility into these regulations. As a matter of allowing flexibility to the exporters, AD banks may allow substitution of the contract and/or substitution of the buyer and thus the packing credit can be repaid/prepaid out of proceeds of any other export bill realized, proceeds of any other export bill financed or advance received against any other order. However, banks should ensure that the substitution is commercially necessary and unavoidable.
(h) Overdue Packing Credit-Monitoring and Recovery
While packing credit accounts financed must be regularly monitored for the end use, regular working, inflows and outflows in their operative accounts, submission of stock statements, servicing of interest and repayment, in case of specific monitoring is required as this is a concessional finance and is transaction based. Since each packing credit loan has its own due date by which time exporter must make shipment and submit the export bill, monitoring of due date or the extended due date, if any, is an important function. In case, the exporter is unable to repay the packing credit on due date, exporter needs to be followed up for repayment from own resources. In case the default persists and the amount is not repaid within a period of 90 days from the due date, the account becomes classified as a Non-Performing Asset (NPA), leading to ceasing of further interest and start of recovery measures, as per prevailing guidelines.
4.2.5 PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)
With the objective of making credit available to exporters at internationally competitive interest rates, in 1992 Reserve Bank of India permitted Authorized Dealers to extend Pre-shipment Credit in Foreign Currency (PCFC) as an additional window, besides packing credit in INR.
EXPORT FINANCE - PRE-SHIPMENT CREDIT
PCFC can be availed for domestic and/or imported inputs of exported goods at rates linked to SOFR (Secured Overnight Financing Rate) for USD or other international Reference Rates which have substituted LIBOR
Under PCFC, credit is provided in foreign currency in order to facilitate the purchase of raw material/components etc. from the international market or domestic markets, as required to fulfil the export order. As per extant guidelines, banks are free to determine the interest rates on export credit in foreign currency, as a markup over benchmark rates. With the end of the LIBOR era, banks are now allowed to charge interest using Alternate Reference Rates (ARR), such as SOFR and SONIA.
The guidelines relating to PCFC are quite similar to that for packing credit in INR, except for the fact that the loan granted is denominated in foreign currency, and is linked to international benchmark interest rates. Thus, parameters like the period of PCFC, quantum, margin requirements, allowing on FOB value of order, tenor, extension and running account facility, are all similar to packing credits in INR.
The facility may be extended in any of the convertible currencies, viz., USD, GBP, Euro, JPY etc., as per availability of funds with the bank and the choice of the exporter. The exporter has the operational flexibility to avail PCFC in one convertible currency in respect of an export order invoiced in another convertible currency, the risks and cost of cross currency transaction being that of the exporter.
Crystallization of overdue PCFC
Since the PCFC is granted in foreign currency, bank’s exposure is in foreign currency and as such this is an additional risk for banks. As such, banks are required to de-link the foreign currency liability in case of non-repayment of PCFC, even after 30 days from the due date, and convert the liability into INR. This restricts the bank’s forex exposure due to any adverse movement in the exchange rates.
Sources of Funds for PCFC
The sources of funds for banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange Earner Foreign Currency Accounts (EEFC), Resident Foreign Currency (RFC and RFC-D)Accounts,
Rs. 625/-
