A Practical approach to dealing with Pre-shipment advance
(Packing credit) and Post-Shipment Advance
a) Purpose and Scope
Packing Credit is essentially a short-term Working capital finance required
by exporter to meet
i. Cost of
raw materials and processing/manufacturing ( by a
manufacturer –exporter ) or cost of finished goods for exports by a
merchant exporter,
ii. Packing and other expenses
iii. Freight and customs duty , wherever applies
b) Eligibility
An exporter must produce to bank a firm export order and/or an irrevocable
letter of credit opened by a Foreign Bank of repute.
In order to treat an export order as “firm”, an export order must
include the essentials particulars as detailed below:
i.
Full Description and quantity of goods
ii.
Unit price
iii.
Sales terms (FOB, C&F, CIF, etc.)
iv.
Time of Shipment
v.
Payment Terms
vi.
Any special stipulation considered necessary for particular type of
goods.
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In case of firm order is not backed by letter of credit, the bank will have to be
satisfied about the credit worthiness of buyer apart from that of the exporter .
c) Security
In general, goods to be exported shall remain hypothecated to bank apart from any
additional security that may be required in individual cases. An Exporter has to
execute necessary loan documents in favour of Bank.
d) Period of Advances and Interest Rate
The period is dependent on the minimum time justifiably required by exporter for
purchasing, packing, shipments and submission of export documents to bank.
Normally a trader-exporter’s requirement will be for a short period, say, 30days
but a manufacturer –exporter may require funds for longer period.
The Maximum period for which packing credit may be allowed is usually
180 days but RBI has directed that the financing bank should not allow advance for
any period beyond the essentially minimum time required for the purpose.
The concession rate of interest to be charged on packing credit has currently
been prescribed by SBI as 7.75% p.a. (i) for a period of 270 days in respect of
specified categories of borrowers and (ii) upto 180 days @14.10% in respect of
export credit not otherwise specified and @14.75% beyond 6 months.
Export credit applicable to specified categories of borrowers under SBI
Exporters Gold Card Scheme upto 270 days @7.50% . Export Credit applicable
to all market segments not covered under interest subvention scheme upto 270
days @9.50% . Export credit applicable to all market segments not covered under
interest subvention schemes upto 270days @9.25%.
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e) Amount of Advances
The amount of packing credit that may be allowed in individual cases will be
determined on the basis of actual requirement viz. cost of raw materials,
processing/manufacturing cost, packing expenses, freight and other expenses,
having regard to the exporter’s own capital and availability of credit from
Suppliers.
f) Advance against export through Export House
Packing credit facility is also available to a manufacturer for the production and
supply of goods to an Export House for eventual export under a letter of credit or
firm export order received by the latter from an overseas buyer. In such cases the
manufacturer’s banker will require the following :
i.
A letter from the Export House giving the particulars of the foreign letter
of credit or firm order and
the
portion
thereof
allotted
to the
manufacturer for production and supply.
ii.
Confirmation from the Export House that they have not taken/will not
take any packing Credit against the portion allotted to the manufacturer.
iii.
Undertaking from the manufacturer Supplier to produce in due course
satisfactory evidence showing that the goods have actually been
exported.
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Post Shipment Advance
a) Banks extended credit facilities to exporters by way of negotiation of bills
under
foreign letter of credit or purchase of bills under firm export orders.
Banks also provide, in approved cases, finance against export bills sent on
collection basis. In the cases where export finance has already been allowed in
the form of Packing Credit against the particular Letter of Credit of firm order,
the negotiation or purchase proceeds of the relative export bill are applied
towards liquidation of the packing Credit dues and balance, if any ,is credited to
the Exporter’s current account.
b) It is essential that the export documents are prepared in strict conformity with
the stipulation of the foreign letter of credit or the firm export order, as the
cases may be. It is always advisable that immediately on receipt of the order
and/or the letter of credit, the exporter minutely scrutinizes the terms thereof
and ensures that he will be able to submit all the documents as called for. If any
particular term is not clear or appears to be confusing, the financing bank
should be immediately consulted for guidance. Where an amendment is
considered necessary, the exporter should lose no time in communicating with
the foreign buyer and get it done before shipment.
c) The concessional rate of interest of 12.5% p.a. is applicable to post shipment
advances also subject to certain limitations. The period for which the
concessional rate will apply is determined on the basis of the usance of the bill
and the “normal transit period” in respect of the country concerned as fixed by
the Foreign Exchange Dealers’ Association of India. In the case of bills drawn
at sight, the facility should be available only for the normal transit period
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(e.g. 15 days for a sterling sight bill on the U.K., 20 days for a US Dollar sight
bill on the USA, 20 days for a Sterling sight bill on France , 30 days for a US
Dollar sight bill on Japan). In the case of usance bills the facility would be
available for a period compromising the normal transit period plus the actual
usance period subject to maximum period of 180 days. With regard to bills
drawn in foreign currencies, the interest is actually cushioned in the rate of
exchange at which the bills are purchased by banks .The Sterling rate schedule
currently prescribed by the Foreign Exchange Dealers’ Association of India
(FEDAI) is based on the interest rate of 12.5% p.a. upto 180days. Banks are
supposed to follow a similar principle in fixing the rate for other currencies.
Advance against Export entitlements
(a) Banks may allow in approved cases Post-Shipments Advances against
export entitlements receivable from the Government by the way of cash
assistance viz.
- Cash Subsidy
- Duty Drawbacks
- Freight differentials
Such advances are available at the concessional interest rate of 12.5% p.a.
for a period of 90 days.
(b) Since 1976 there has been in operation a special scheme called “ Duty
Drawbacks Credit Schemes , 1976” under which banks may allow interest free
loan to the Exporter for a period not exceeding 90 days against his Duty
Drawbacks entitlement, as provisionally certified by the customs authorities
pending final sanction and payment. The Bank in its turn is supposed to obtain
from Reserve Bank Of India interest free refinance for a like period .The
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scheme has not worked satisfactorily because of the complicated procedure of
work involved .
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Compiled by: A.K.Paul , Senior Lecturer (Finance), Accman Institute of
Management ,Greater Noida
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