Types Of Pre-Shipment Finance
Following below are some special schemes available in respect of pre-shipment finance:
- Extended Packing Credit Loan: it is a type of loan which is given only to those exporters who has a rating of first class exporters given by the commercial banks on the basis of their creditworthiness. It is basically granted for making advance payment to the suppliers in order to acquire goods that are to be exported. These types of advances are considered as clean advances as it does not include any documentary evidence for a short period of time.
- Packing Credit Loan (Hypothecation): it is basically provided to the exporters in order to acquire the raw materials, work-in-process or finished goods that are meant for exports. These goods are then treated as security for sanctioning of loan. Under this facility, it is mandatory for the exporter to provide a hypothecation deed in favour of the bank, till the time the possession of goods is in the hands of the exporter.
- Packing Credit Loan (Pledge): this loan is given to those exporters who gets the duty to acquire seasonal raw materials or materials which are packed up in odd or brunched lots. The documents relating to raw materials are kept in safety with the bank until the possession remains with the exporter.
- Secured Shipping Loan: Secured shipping loan can only be obtained after the goods are handed over to the transporter or the agent who is responsible for clearing and forwarding of shipment. It is either released against lorry receipt or railway receipt. It is provided for a very short period of time, only until the goods are dispatched to the port and completion of shipping and customs formalities is done.
- Advances against Red Clause L/C: If the exporter wants to obtain packing credit then he must request the importer to open red clause L/C. Red clause L/C gives the authority or authorisation to all the local banks where they can grand advances to the exporters so that they can easily meet their working capital requirements, then only the processing is done. Such advances are only guaranteed by the issuing bank.
- Advance against Cheque or Draft: advance against cheque is only granted if exporter has received direct payments from abroad via cheques or drafts, then only there is a possibility that bank may grant export credit at concessional rate to the exporters having only who have a good track record, till the time of realisation of the proceeds of the cheque or draft. The banks however, must ensure themselves that the proceeds are against an export order.
- Packing Credit Facilities for Consultancy Services: In case of consultancy services, exporters have no concern with the physical movement of goods out of Indian customs territory. In such cases, pre-shipment finance is provided by the bank in order to allow the exporter to mobilise resources for example technical personnel and training them.
- Racking Credit Facilities to Deemed Exports: Deemed exports that are made to aid multilateral funds projects and programmes, whose orders are being secured by the global tenders for which payments are made in tree foreign exchange, are also eligible for concessional rate of interest facility.
Features Of Pre-shipment Finance
Following are the features of pre-shipment finance:
- Eligibility: Pre-shipment finance is available to all types of exporters such as:
- Merchant exporters
- Manufacturer exporters
- Export and Trading houses
- Manufacturers who supply goods to export houses (EH) trading houses (TH) or merchant exporters.
- Documentary Evidence: below are the following documents that are required to be submitted by the direct exporter if they wish to avail pre-shipment finance:
- There should be a confirmed export order/contract and/or
- Availability of a non replacing letter of credit which will work in favour of the exporter; or
- Original cable/fax/telex message that gets exchanged between the exporter and between the buyers.
- Purpose: Packing credit by the banks are granted only for specific purposes such as purchase, processing, manufacturing or packing of goods that are defined by the Reserve Bank of India. Following are the purposes for which pre-shipment finance is provided:
- In order to avail raw materials, components, machinery, equipment and technology which are required for export production.
- It takes measure that the quality of the goods will increase and to confirm the international standards.
- They also wish to adapt product to the requirements of foreign markets, improve existing products, product addition and product extension.
- Amount of Finance: Banks have got all the authority to find the amount of pre- shipment finance. The only guideline principle which is important is the concept of Need Based Finance. Banks find out the percentage of margin, depending on factors like:
- The nature of the following order.
- The nature of the following commodity.
- The capability of exporter to bring up the required contribution.
- Period of Credit and Rate of Interest: interest: The maximum duration until the exporters can get done with the packing credit is 180 days, however bank may exceed at its own decision, without concerning to RBI.
RBI has instructed the banks to provide pre-shipment finance at a discounted rate of interest. Interest rates on pre-shipment finance advances are regularly revised by the Reserve Bank of India (RBI). Also the banks have the authority to charge any amount below the ceiling rates
- Disbursement of Packing Credit Advance: once the proper examination of the documents and files are completed, the next step by the bank is to ensure if the exporter has executed or not. It also make sure if the following information is mentioned or not:
- Name of the buyer,
- Name of the Commodity to be exported.
- Quantity and other specifications.
- Value of goods, either CIF or FOB.
- Last date of shipment/negotiation.
- Maintenance of account, monitoring and repayment: According to the RBI directives, the banks have got a role of maintaining a separate account of each packing credit. However, running accounts are only given permission if the exporter is situated in FTZs, EPZs and the 100% EOUs.
Pre-shipment finance should be used and should be limited only for the purposes for which it is responsible. Hence, the lending bank keeps an eye on the use of finance by the exporter in every area. If there comes any default from the side of the exporter, it will charge him with a high rate of interest.
Pre-shipment finance is mainly responsible only for the incentives given by the government or against the export proceeds received by the bank. We shall keep in mind that you cannot use the post-shipment finance for the local funds.