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Pre-shipment finance is one of the options available to you where you can get finance to meet all the financial needs of your business before shipping the goods to an overseas buyer. If you are an exporter having a firm order placed by a foreign buyer or an irrevocable letter of credit in your favor, you can get finance for the purpose of buying, manufacturing, processing, packing and shipping the goods to an overseas buyer in the form of Pre-shipment finance. Pre-shipment finance can be availed by an exporter for the purpose of,
Buying Manufacturing Processing Packing Purchase of row material Pre-shipment inspection Insurance Transport charges Export duty Dock charges Custom house charges
Pre-Shipment Finance
A pre requisite to avail of pre-shipment financing is that the Exporter should have a credit facility in place with a bank. Each bank has a credit process that determines the amount of funding the bank can give the company. 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 is to enable exporter to:
Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.
A letter from the concerned export house/trading house certifying the portion of exort order allotted in their favour,and An undertaking from the concerned export house/trading house starting that they, do not wish to obtain packing credit facility againstthe same transaction for the same purpose till the original packing credit is liquidated. c) Purpose:Packing credit is granted for specific purpose such as defined by the reserve bank of india. d) Amount of finance:The amount of packing credit is based on: The amount of export order. The credit rating of the exporter done by the bank and, The exporters receivables on account of incentives like international price. Reimbursement schemes (IPRS), duty drawback(DBK), etc. Generally, the amount of packing credit does not exceed the FOB value of the goods to be exported or their domestic value whichever is less. e) Period of credit The packing credit can be granted for a maximum period of 180 days from the day of disbursement. However , it can be further extended for the period of 90 days with the prior permission of the RBI . f) Rate of interest The interest payable on the pre shipment finance is usually lower than normal rate provided the credit is liquidated from the exporter proceeds receive from abroad within the period specified . g) Loan agreement of disbursement of loan Before the disbursement of the loan the bank require the exporters to execute a formal agreement. Though the entire amount of packing credit is sanctioned at a time. It is generally realized in installments.
h) Maintenance of account As per the RBI directives , the bank are required to maintain a separate account in respect of each packing credit. However, running accounts are permitted in case of exporters situated in FTZs, EPZs,and the 100% EOUs. i) Monitoring the use of loan Packing credit should be used strictly for which it is granted. Hence , the leading bank monitors the use of finance by the exporters. Any default on the part of the exporters is charged with a higher rate of interest.
The banking practice is that the exporter can obtain 90% of the FOB value of the order or 75% of the CIF value of the order. 1. What is the tenor of this funding?
The RBI has allowed banks to grant this funding at a concession for a maximum period of 180 days. This period can be extended by the bank without referring to RBI for a further period of 90 days. Banks grant this extension in cases where the exporter faces genuine hardships in completing his order. If an extension is required beyond 270 days (i.e. 180+90 days), the RBI has the discretion to grant another (maximum) extension of 90 days. However, if the exports do not take place at the end of this period, the bank will charge interest from day one, at a rate left to the banks discretion.
4. What are the ways in which I can liquidate the pre-shipment finance ?
The pre-shipment facility can be liquidated by proceeds of export bills negotiated, purchased or discounted. As far as possible, banks don't encourage liquidation by debit to cash credit account. Another interesting thing is that, once the goods are shipped out and documents tendered to the bank, the pre-shipment advance is converted to post-shipment advance. In the case of PCFC credit, pre-shipment finance is liquidated by discounting bills under the Rediscounting of Export Bills Abroad scheme. PCFC can be liquidated by discounting of export bills, or by grant of foreign currency loans by a bank. Once the exporter avails of PCFC, he will not be eligible for post-shipment credit in rupees; he will have to avail of post-shipment funding in the same currency in which he availed of the pre-shipment funding.
5. Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The subsupplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit. 6. Advance Against Exports Through Export Houses: Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction. 7. Advance Against Duty Draw Back (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as post-shipment advance against claims for DBK.
8. Special Pre-Shipment Finance Schemes: Exim-Banks scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC) to exporters. Packing credit for Deemed exports.
DISBURSEMENT OF PACKING CREDIT: After proper sanctioning of credit limits, the disbursing branch should ensure: To inform ECGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction.
I. II.
To complete proper documentation and compliance of the terms of sanction i.e. creation of mortgage etc. There should be an export order or a letter of credit produced by the exporter on the basis of which disbursements are normally allowed.
In both the cases following particulars are to be verified: I. II. III. IV. V. VI. Name of the Buyer. Commodity to be exported. Quantity. Value. Date of Shipment / Negotiation. Any other terms to be complied with.
The FCPC is available to exporting companies as well as commercial banks for lending to the former. It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance.
To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting /rediscounting of export bills. To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the export bills in foreign currency. FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit.
Pre-shipment credit in foreign currency shall also be available on exports to ACU (Asian Clearing Union)countries with effect from 1.1.1996.
Eligibility:
PCFC is extended only on the basis of confirmed /firms export orders or confirmed L/Cs. The Running account facility will not be available under the scheme. However, the facility of the liquidation of packing credit under the first in first out method will be allowed. Order or L/C : Banks should not insist on submission of export order or L/C for every disbursement of pre-shipment credit , from exporters with consistently good track record. Instead, a system of periodical submission of a statement of L/Cs or export orders in hand, should be introduced. Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the disclaimer from the export order.