Pre Shipment Credit: Types of finance,features,sanction,documents required,period of finance,interest rates, Finance in Foreign currency

1. PRE SHIPMENT CREDIT

2. Contents
 Introduction
 Classification
 Packing Credit
Eligibility
 Security
 Quantum of Finance
 Period/Interest Rate
 Running Account
Advances against incentives receivable from Government
Pre-Shipment credit in Foreign Currency(PCFC)
Examples
References
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3. Introduction
 Needed for: Purchase of raw materials
 Components, processing cost
 Transportation
 Packing, packaging
 Warehousing
 Providing credit facilities to the importer
 ‘Buyer prefers that party who provides finance for
his purchase’

4. Classification
1. Packing Credit
2. Advances against incentives receivable from
Government
3. Pre-Shipment credit in Foreign Currency(PCFC)

5. 1.1 Eligibility
 Confirmed Export Order or Irrevocable letter of
credit.
 Export/Trading/Star Trading/Super Star Trading
House or exporter.
 Exporter of services
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exporters of all the 161 tradable
services covered under the General Agreement on Trade
in Services (GATS)
 Supplier/supporting manufacture of exporter
 Letter from export house indicating details
 Supplier and exporter will share the finance.

6. 1.2 Form of Finance
 Fund Based
 Dependent upon the stage of execution of order
 Release loan from time to time
 Non Fund Based
 In the form of letter of credit
 Issue of various types of guarantee

7. 1.3 Security
 Clean
 Raw material not acquired
 Secured
 Goods possessed, title acquired
 Goods pledged or hypothecated to bank
 Credit becomes secured

8. 1.4 Quantum of Finance
 RBI guideline
 No export order should suffer from want of finance
 Should be adequate
 Domestic cost of production or FOB value of export
order, whichever is lower

9. 1.5 Margin Requirement
 No fixed norms
 Ensure business sense and consciousness to the
exporter
 No intention to finance the profit component in the
export contract
 Export Credit Insurance Whole Turnover Packing
Credit (ECIB-WTPC)
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Protects banks against losses due to exporter‟s default
nominal guarantee fee, borne by the exporters.

10. 1.6 Period /Interest Rate
 Initially for 180 days
 According to production cycle
 90 days extension in
 „circumstances beyond exporters control’
 Revalidated export order or L/C.
 Concessional rate of interest as per RBI
 Less than the prime lending rate of the bank

11.  No other service charges other than stipulated by
“Foreign Exchange Dealers Association of India”
 If found abusing the facility, commercial lending rate
ab initio.
 Premium paid to ECGC to be borne by exporter.

12. 1.7 Sanction of Packing Credit Limit
 Based on the assessment of the bank in respect of
credit needs.
 Separate packing credit loan account is opened for
every export order.
 Bank takes undertaking that:
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Negotiation will be through the bank
Account will be closed through these proceeds
Receivables/duty drawback into that account

13. 1.8 Closure of Packing Credit Loan
 Closed with realization of sale proceeds
 Balance not allowed to continue
 Transferred to another account
 Advances treated as post shipment finance
 As per compliance to ECGC .

14. 1.9 Running Account Facility
 RBI permits even without export order/letter of credit
subject to:
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Satisfaction of the bank
Unblemished track record
L/C order to be submitted within reasonable period.
Not more than 180 days.
EOUs, EPZs and SEZs.

15. 1.10 Packing Credit under Red Clause L/C
 Credit at risk and responsibility of the Foreign Bank
establishing the L/C.
 Remains unsecured till hypothecation

16. 2. Advances against Incentives
 Generally sanctioned at post shipment stages.
 Under exceptional circumstances
 Cost of production > FOB value of goods
 Subject to the conditions
 Covered under “Export Production Finance Guarantee of
ECGC”
 Advances repaid from proceeds of shipment and receipt
of incentives
 Premium paid to ECGC, borne by exporter

17. 3. Pre Shipment Credit in Foreign
Currency(PCFC)
 To import the raw material to execute the export
contract
 Available in all foreign currencies US Dollars, Pound
Sterling, Japanese Yen, Euro, etc.
 No sanction without confirmed export order or
irrevocable L/C.
 Self liquidating in nature

18. 3.1 Source of Funds for Banks
 The foreign currency balances available with the bank
in
- Exchange Earners Foreign Currency (EEFC) Accounts,
- Resident Foreign Currency Accounts (RFC)
- Foreign currency (Non-Resident/Exporters)Accounts
- Escrow Accounts
Foreign Currency line of credit
 lines of credit with overseas banks (or other domestic banks) without the
prior approval of the RBI,
 provided the rate of interest on the line of credit does not exceed 1
percent above LIBOR/EURO LIBOR/EURIBOR.
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http://www.investopedia.com/terms/l/libor.asp
http://www.diffen.com/difference/EURIBOR_vs_LIBOR

19. Examples
 http://www.federalbank.co.in/export-pre-shipment-
credit
 https://www.sbi.co.in/ibg/wholesale/project.htm
 http://www.icicibank.com/businessbanking/tradeservice/export-finance.html

20. References
 http://www.iibf.org.in/documents/export-credit.pdf
 http://www.Investopedia.com
 http://www.eximbankindia.in/?q=corporate-banking
 http://rbidocs.rbi.org.in/rdocs/notification/PDFs/2473
8.pdf

21. Questions??

22. THANK YOU