Pre shipment credit

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Information about Pre shipment credit
Finance

Published on March 6, 2014

Author: chanjot

Source: slideshare.net

Description

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

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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