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Pre & Post Shipment Finance in Export Trade [Submitted by CA. Vibhuti Gupta, April 16, 2008 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 are to enable exporter to:
Types of Pre Shipment Finance
Packing Credit - is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived. Packing Credit is extended in the following forms:
Requirements for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:
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. Different Stages of Packing Credit I. 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. The Bank extended the packing credit facilities after ensuring the following :-
II. 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 provides 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"
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. III. 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 these stocks. IV. Liquidation of Packing Credit Advance - Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting pre- shipment credit into post shipment credit. 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. V. 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. Authorized dealers are permitted to extend Pre-shipment 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 Inter-bank Offered Rate (LIBOR). 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(Non Resident) Accounts. 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. Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don't wait for the importer to deposit the funds. Basic Features The features of post-shipment finance are:
Financing For Various Types of Export Buyer's Credit Post-shipment finance can be provided for three types of export :
Types of Post Shipment Finance :- The post shipment finance can be classified as :
Export Bills Purchased/ Discounted. (DP & DA Bills) - Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. Export Bills Negotiated (Bill under L/C) - The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks:
Advance against Export Bills Sent on Collection Basis - Bills
can only be sent on collection basis, if the bills drawn under LC have
some discrepancies. Sometimes exporter requests the bill to be sent on the
collection basis, anticipating the strengthening of foreign currency.
Banks may allow advance against these collection bills to an exporter with
a concessional rates of interest depending upon the transit period in case
of DP Bills and transit period plus usance period in case of usance bill. Advance against Export on Consignments Basis - Bank may choose
to finance when the goods are exported on consignment basis at the risk of
the exporter for sale and eventual payment of sale proceeds to him by the
consignee. Advance against Undrawn Balance - It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within stipulated time from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment. Advance Against Claims of Duty Drawback - Duty Drawback is a
type of discount given to the exporter in his own country. This discount
is given only, if the in-house cost of production is higher in relation to
international price. This type of financial support helps the exporter to
fight successfully in the international markets. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.
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