The pioneers of export credit financing are the RBI (1967) in India. Accordingly, they made available short-term credit to assist the exporters in consignment (Pre and post shipment). Additionally, they provide a compatible interest rate that further benefits the exporters. Further, this credit is attainable in the form of rupee and foreign currency.
Pre Shipment Finance
This type of finance is when the exporters requires financial aid (payment) prior shipment of the consignment. Typically, the buyer paying the seller before the transaction for assisting the seller with raw materials, production, storage, packing, and shipment. Consequently, this is available after confirmation of the order by issuing a Letter of credit in favor of the exporter or on the basis of proforma invoice/contract of the export order. Following conformation, pre shipment finance is available in rupee or overseas currency.
Types of Pre Shipment Finance
- Packing credit
- Advance against Cheque or Draft, depicting early payment.
Packing Credit
The bank provides the packing credit to the exporter, if and when he submits a letter of credit in his favor or export contract. Besides, the letter of credit must be from the importer for an irreversible transaction (export of goods). Despite the buyer’s letter of credit, any proof verifying the true functional status of the order helps exporter attain this loan. Subsequently, on receiving the finance, the exporter could invest in acquiring, dispensation, production, packing of the exportable goods.
Banks also set Packing credit limit for exporters based on collateral they provide which can be in the form of a property or Fixed Deposit. In such cases, banks require contract copy and proforma invoice of the order to issue packing credit accordingly.
Necessities to Attain Packing Credit
Initially, before applying the exporter must cross-check if he/ she is eligible for the financial loan. Further, the applicant must submit a set to documents as a form of exporter verification.
Eligibility for Pre Shipment Finance
- Must own a DGFT importer exporter code
- Note, should not be present in the RBI caution list
- When the consignment is not existing under OGL (Open General License), the export should have a supplementary permit that is necessary to export the goods.
- Only those exporters that have the order under their name.
But, in some exceptional scenarios, the institution grants the loan to other manufacturers or suppliers that don’t have their names on the orders. Such an exceptional case is when there is an outsource or more than one exporter is involved in the trade
Supporting Proof for the Bank
- Application to release the credit plus a clause specifying the due date for shipment. Also, must mention the due date to submit the documents to the bank
- Further a firm proof for order conformation- Could be the Letter of credit, Original cable or fax or message between the buyer and the seller
- In addition to that, DGFT license (or other respective licenses)
Portion of Finance
The finance is offered to the exporter on the submission of the letter of credit. However, the abides the general rule of Need-Based finance. Thus, the banks set the margins based on:
- Nature of order
- Type of commodity
- Exporter’s ability to achieve the obligatory contribution
Phases of Pre shipment Finance
Assessment and Approval of limits
Prior sanction of any financial aid, the banks examine several aspects such as the profile of the produce, country details, buyer information, and so on. Accordingly, to perform the same institutions namely ECGC, Dun and Brad street, etc will aid the bank. Following the scrutinization, a packing credit is released. Despite the release, the bank will confirm the status of the exporter (regular, good standing in the market), in case the exporter posses all the necessary permits and licenses. Finally, if the exporter’s country in under Restricted Cover Countries (RCC).
Distribution of Advance Packing Credit
Following the submission and verification of all the supporting documents, the release of allowance follows. However, in some instances, the exporter will not be able to submit the order in time to acquire the packing credit. Nevertheless, the bank offers an alternative packing credit in the form of Running Account Packing.
Yet, the exporter must submit the following information:
- Buyer’s Name
- Commodity to be shipped
- Quantity of the consignment
- Value of the goods (CIF/ FOB)
- The due date for shipment
- Supporting information to compile.
The Structure of Pre shipment Finance
Firstly, finance is set based on FOB value mentioned in the letter of credit or the market value of the goods (whichever is lower). Nonetheless, the insurance and freight costs are added later on during shipment. Further, the allowance is only in the form of drafts, bankers, or cheque and never in the form of cash. Also, the duration of credit is based on the time taken for the processing of the goods. Accordingly, the credit is availed for 180 days, yet a 90- day extension is provided by the bank without RBI’s monitory restrains.
Monitoring the Packing Credit Advance
This phase involves issuing a stock statement containing necessary details about the stocks. Further, the bank considers this as a confirmation for securing the credit. Additionally, the is responsible to set the rate of stock submission. Besides, the bank also examines the stocks regularly
Insolvency of Packing Credit Advance
Following credit allowance, it is important to liquidate the allowance as the export proceeds. Thus, transforming the pre-shipment to post-shipment. Besides, the liquidation can be in the form of drawback duty and Market Development Fund (MDF) from the government of India.
If the shipment stops and the order is canceled after credit, the advance can be recovered (with a specific interest). However, RBI allows this only when the situation is unavoidable and an absolute necessity.
Overdue Packing
If the exporter fails to pay in time, the bank considers this as an overdue. Also, if is proceeds for a certain duration, the bank will begin its recovering due procedure.
Peculiar Instances
1. Packing Credit to Sub Supplier
Packing credit is officiated between the Export Order Holder (EOH) and the manufacturer. Consequently, this clause specifies that no extra credit facility is attained for the transferred goods. Further, a copy of the Letter of credit is necessary. Now the exporter will transfer the rights to a sub-supplier who will receive the credit and thus, monitor the supply of goods. However, this holds good only for the production stage of the export.
2. Running Account Facility
As mentioned earlier, the bank release credit to an exporter for exporting the goods. The bank facilitates this type of credit depending upon the exporter’s track record. Nevertheless, the exporter still has to submit the letter of credit and order within an extended period.
3. Pre-shipment Advance in Foreign Currency
This allows the exporters to receive the credit internationally. Additionally, it aids in procuring raw materials and the completion of export orders. Though the interest rate is associated with the London Interbank Offered Rate (LIBOR), the rates must not exceed 0.75% for 6 months (excluding tax). Further, sources of funds are Foreign Currency balance in the bank, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts (RFC(D)), Escrow account, and Foreign Currency Accounts. Following credit, not the exceed the limit.
4. Deemed Exporters Availing the Packing Credit Facility
With a concession in interest rates, deemed export aid projects that secure global trades. This facilitates payment with free foreign exchange.
5. Credit for Consulting Services
In such services, there is no movement of goods. Thus, the credit facilitates services such as training and technical resources
Advance Against Advance payments
This is another type of pre-shipment credit, where the payment received is used as proof by the exported to issue Pre-shipment finance.
Post Shipment Finance
In this case, the credit is issued based on the shipment made. Accordingly, this is provided only after the shipment date. Further, this could be secure or insecure. As the credit is self- liquidating, that is the bank receives the title of goods. Also, this credit may be funded (project export, issue of guarantee) or non- funded.
Quantum and Period of Finance
Up to 100% of the value of goods is attainable in post-shipment finance. Accordingly, the value of the goods raises the value of the exporter order, and finance of price difference is settled by the government. Further, the time frame could be short term or long term. For instance, cash exports the period is 6 months. Additionally, the applicant should submit the document within 21 days of shipment.
Types of Financing
- Physical exports: Only to the exporter
- Deemed Export: Supplier of goods
- Capital goods and project exports: For the overseas buyer
Types of Post Shipment Finance
Export Bill Purchased or Discounted (DP and DA Bills)
These bills are used as sale contracts that can be brought by the banks. Subsequently, utilized in indubitable global trade transactions. Also, a limit is present that is provided to the exporter for buying the export bill
Export Bills Negotiated (Bill under Letter of Credit)
The risk is almost negligible when credit is based on the letter of credit. Consequently, the bank readily agrees for this type of credit. Yet, the risk is inevitable, thus, the major risks are
- The under performance of exporter thereby does not achieve the terms. Thus, nullifies the letter of credit
- When the issuing bank does not honor the commitments
Advance Against Export Bills Directed on Collection Basis
Collection bill is when the letter of credit has certain inconsistencies. Further, this is issued forestalling the strength of a foreign currency.
Besides that, advances are issued against export on Consignments Basis, undrawn balance, and claims of duty drawback.
Overdue Export Bills
Here the foreign currency is transformed into rupees. Accordingly, the same occurs 30 days after the expiry of NTP for unpaid DP bills.