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Pre-shipment Finance Overview

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.

Importance of Finance at Pre-shipment stage


To purchase raw material,machinery,equipment,technology and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labelling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses. To improve the quality of goods so as to conform to international standard. To pay for internal transportation and marine freight

Pre-shipment Finance Benefits


It is one of the cheapest,easiest,and the most liberal finance available to the exporters. Helps to maintain a better cash flow for the business, since the money is available against every confirm export order. Provides working capital for the current orders that reduces the financial burden on the business. By knowing that funds will be available you can go for bigger orders and maximizing the profit. Helps to unlock the full potential of your export business. Expand your company's business opportunities and increases competitiveness in international markets. Minimize risks and maximize profits associated with international trade.

Features of pre-shipment finance.


a) Eligibility:It is available to all type of exporter such as: Merchant exporters Manufacturer exporters Export house Trading house Star trading house Super star trading house and, Manufacturers supplying goods to EH/TH/STH/SSTH or merchant exporter. b) Documentary evidence:The folloing documents are required to be submitted by the direct exporter for availing pre-shipment finance: A confirmed export order and/oar; An irrevocable letter of credit opened in favour of exporter. An indirect epoter who exports through export houses/trading house. STC etc. are also eligible for the packing credit on the production of the following documents:-

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.

1. Who is eligible for pre-shipment credit?


An exporter who holds an export order or Letter of Credit (LC) in his own name to perform an export contract can avail of pre-shipment credit. Banks may also grant pre-shipment advances without insisting on prior lodgment of LCs or purchase orders. This is known as the "Running Account Facility".

2. What is the purpose of this finance?


Pre-shipment finance can be availed of only for the specific purpose of procuring raw materials / purchasing / manufacturing / processing / transporting / warehousing / packing and shipping the goods meant for export.

3. How much financing can I as an exporter get?


This is need based financing, - which means that banks will lend an amount to you after factoring in a particular margin (this margin is calculated as a percentage of the value of the order). The margin differs from bank to bank. Margins are stipulated for the following reasons : to ensure that the exporter has some stake in the transaction to cover any erosion in the value of goods, and to ensure that there is no lending against the exporter's profit margin.

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.

2. In what currency's can the exporter obtain pre-shipment credit?


Most often the pre-shipment borrowal is in the domestic currency, in the case of an exporter based in India, the Indian Rupee. However in some cases, the exporter may want to borrow in foreign currency because his product has a large import component or he finds the cost of borrowing in foreign currency lower than borrowing in the local currency. Borrowing in foreign currency is feasible when the cost of Rupee borrowing (less the currency premium) is greater than the cost of borrowing in the foreign currency. This is discussed in greater detail in " when does foreign currency risk arise?" This will be easier to understand with the help of an example. Let us assume that an exporters exports and imports are both payable in US Dollars. Let us also assume that the import component is significant at, say, 70%. In this case, the exporter is open to the effects of currency movements both at the time of import, and then at the time of export. Borrowing in USD can hence partially hedge his currency risk on the export side, since his exports are also going to be in the same currency. The above facility, allowed to exporters to avail of pre-shipment credit in foreign currency, is termed as Pre-Shipment Credit in Foreign Currency or PCFC.

3. What is the cost of pre-shipment finance ?


Pre-shipment credit : Upto 180 days - 10% Between 180 270 days - 13% Over 270 days - Commercial rates which are likely to be higher than the rate applicable upto 270 days. USD Lending (PCFC) - Maximum of Libor + 1.5 pct

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.

Forms or Methods of Pre-shipment Finance:


1. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security. 2. Advance Against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank. 3. Advance Against Pledge: The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter. 4. Advance Against Red L/C: The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit.

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.

Some Schemes in Pre-shipment stage of finanace


a. PACKING CREDIT SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should be considered while sanctioning the packing credit advances viz. I. II. III. IV. V. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. Quantum of finance. Standing of credit opening bank if the exports are covered under letters of credit. Regulations, political and financial conditions of the buyers country.

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.

b. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC)

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.