Published on March 6, 2014
PRE SHIPMENT CREDIT
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
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’
Classification 1. Packing Credit 2. Advances against incentives receivable from Government 3. Pre-Shipment credit in Foreign Currency(PCFC)
1.1 Eligibility Confirmed Export Order or Irrevocable letter of credit. Export/Trading/Star Trading/Super Star Trading House or exporter. Exporter of services 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.
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
1.3 Security Clean Raw material not acquired Secured Goods possessed, title acquired Goods pledged or hypothecated to bank Credit becomes secured
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
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) Protects banks against losses due to exporter‟s default nominal guarantee fee, borne by the exporters.
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
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.
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: Negotiation will be through the bank Account will be closed through these proceeds Receivables/duty drawback into that account
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 .
1.9 Running Account Facility RBI permits even without export order/letter of credit subject to: 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.
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
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
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
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. http://www.investopedia.com/terms/l/libor.asp http://www.diffen.com/difference/EURIBOR_vs_LIBOR
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
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
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