Explain packing credit in detail? in Englsh...............

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Explain packing credit in detail?

Packing credit is basically a loan provided to exporters or sellers to finance the goods’ procurement before shipment. The bank will make the funds available to a letter of credit issued favoring the seller and a confirmed order for selling the goods or services. The advance is provided to purchase raw materials, process, manufacture, pack, market and transport the required goods and services.

At times, the packing credit is also used for financing the working capital and meet the requirements of wages, travel expenses, utility payments, etc. for companies listed as exporters.

Generally, importers are not ready to advance payments to exporters as it is not secure and full of risk for them. In such scenarios the facility of export packing credit supports the exporter’s supply chain and provides them funds to bridge the gap till the final payment. The bank issuing the packing credit will usually advance the partial or full proportion of the invoice, depending on the assumed risk. The packing credit is especially very viable for exporters who export goods overseas as it has a more flexible repayment plans than the usual bank loans. The loan can be granted in either the exporter’s currency or another easily convertible currency mutually decided by both the exporter and the lending bank.

Banks and other lending institutions follow their internal processes such as verification of the buyer, scrutiny of the purchase order or the letter of credit to authenticate the transaction. However, the documentation and the credit process is not very complicated in a packing credit loan. The loan can be in the form of a fund-based or a non-fund-based credit.

Features of Packing Credit

The packing credit has the following features:

1. Self-Liquidating: The Self-liquidating feature is the most significant feature of packing credit. The loan can be liquidated against the final payment of the goods and services or can even be converted to post-shipment finance post the shipment of the goods. This is extremely beneficial to small exporters who may not have the required capital. This also eliminates a lot of risk from the financing as the bank has the assurance of payment before the exporter receives the proceeds.

2. Credit to Buy Goods: Packing credit is a convenient way to purchase expensive goods or raw materials even if they exceed the set budget.

3. Covers Manufacturing Expenses: Packing credit also covers the manufacturing – related expenses like wages, a cost of raw materials, etc. This is especially useful if the exporter has outsourced all or a part of the goods to be shipped.

4. Lower Rate of Interest: Packing credit charges a lower rate of interest as compared to a typical overdraft facility. All the banks may not have standard interest rates for packing credit as it varies depending on the business’ nature, borrowing amount, etc. However, it will surely be lower than various standard loans.

5. Flexible Terms of Credit: Due to its self-liquidating feature and customized loans, packing credit enjoys flexible terms. The bank allows the exporter to repay the loan after he receives the final payment and continues to finance all the interim needs of the exporter.

Conclusion: Packing credit is an essential pre-shipment finance available to the exporters. Instead of emptying their own liquid reserves, the banks and other lending institutions provide them with a cheap and convenient way to support their supply chains.

References

1. Types of Packing Credit (Pre-Shipment Credit): Packing Credit is a pre-shipment credit extended to the exporters to facilitate him for meeting several financial requirements such as raw materials and its processing, packing, storing and shipping of goods. It is a short term credit available to all exporters. Hence, this is called pre-shipment credit which is essentially working capital finance made available to the exporters to arrange for goods as per the export. It is generally granted in the form of loans or cash credits. It may also be granted in the form of overdraft facilities. The exporter who wants to avail the pre-shipment credit facility should make a formal application to his bank along with the firm contract with the buyer or a copy of the export order or a copy of the letter of credit.

Major Types of Packing Credit

purchase of Pre-shipment finance is available in various forms. Important types of packing credit are explained very briefly.

1. Extended Packing Credit Loan: This type of packing credit is advanced by the bankers to their customers who are considered as first class customers for them. This facility is extended for a short period in order to enable the customers acquire or procure goods. Once goods are acquired in the custody of the exporter, the bank converts this clean advance into hypothecation or pledge loan.

(a) Packing Credit Loan (Hypothecation): This facility may be an extended one over what we had studied above after procuring the raw materially by the customer. Or this credit may be made available for obtaining raw materials, work-in-progress and finished goods. Such goods are made available as security for loan granted. The production of such materials and work-in-progress or raw work-in-process into finished goods can be undertaken even by sub-contractors.

(b) Packing Credit Loan (Pledge): This facility is available for material which are seasonal or obtained in odd bunched lots. The documents relating to acquisition of raw materials are pledged to the bank, while possession remains with the exporter. Such raw material is pledged with the bank to obtain advances.

2. Secured Shipping Loans: This loan is available to the customers when the finished goods are got ready for -export. However, loan will be released only after the raw materials are purposes converted into finished product, or as exportable product and the same of are handed over to transport operators or clearing and forwarding agents for shipment. These loans are for every short duration and the loans will be sanctioned only on lorry receipt or rail receipt. The only condition which bank insists on is that the goods are handled by approved transport operators or clearing or forwarding agents.

3. Advances against Back-to-Back Letter of Credit: In this case, the exporter opens letter of credit in favor of supplier instead of blocking the funds for the purchase of raw materials or finished products from manufacturers. When the exporter who has received original letter of credit, requests his banker to open a letter of credit, in favor of his supplier, it is called opening back-to-back letter of credit is that it is based on original credit and calls for documents evidencing dispatch of goods mentioned in the original credit.

4. Red or Green Clause Letter of Credit: Red clause letter of credit authorizes the negotiating banker to make advances to a beneficiary to enable him to purchase goods and deliver them to the company for the purpose of export. Unless and until they are purchased and shipped, it is impossible for the shipper to obtain the Bill of Lading and Insurance Policy. In the event, shipper needs packing credit, he has to request the buyer to arrange for opening a red clause letter of credit which contains a special clause typed in red, authorizing the advancing bank to make either immediate payment to the beneficiary in full or in parts, as per the terms provided in the letter and against specified documents and conditions.

According to Green Clause, credit is provided for storage of goods at the port. Pre-shipment of finance, as well as storage, facility will be available to the exporter under this letter of credit. Both red and green clause credits used extensively in Australian Wool Trade. For such a letter of credit in India, prior permission of government is required.

5. Advances against Export Incentives: Advances against export incentives are usually granted at post shipment stage. However, under certain circumstances like, when the value of material to be produced exceeds as compared to FOB value of the contract, such advances are granted at pre-shipment stage. These advances are repaid by negotiation of export bills and cut of receipts of export incentives. Concessional rate of credit at the rate of 13 percent is available for 90 days to the exporters. These advances are covered by ECGC policies.

6. Advances Against Duty Drawback: The import duty paid on raw materials or components for export production or the excise duty paid on items indigenously produced for export are repaid to the exporter on completion of the export. The several items on which duty drawbacks are determined by the policies of the Government. The need for advance against duty drawback arises because of the delay involved in verifying the claims of the exporter on completion of the export. The items on which duty drawbacks are eligible will have the funds locked up till the government releases them after duc verification the claim. During this interval, the exporter seeks financial assistance from the bank as the amounts due to him are locked up.

7. Packing Credit for Imports Against Entitlements under Advance Licence: The credit facility is available to manufacture of export goods. However, two conditions need to be fulfilled:

(a) The bank is satisfied that the imported material will be utilized for the items exported abroad.

(b) Letter of credit or firm order is produced within reasonable time which should not exceed 60 days from the date of advance.

8. Pre-shipment Credit in Foreign Currency (PCFC): Under the PCFC scheme, exporters are allowed to avail pre-shipment credit in a convertible currency at interest rates not exceeding 0.75 per cent over 6 months LIBOR, i.e., on the basis on London Inter Bank Offered Rate. The credit will be self-liquidating in nature and will be adjusted by discounting the relative export bill designated in foreign currency. The credit under this scheme is available for a maximum period of 180 days. If extended beyond this period, 2 percent penal interest is charged. If the PCFC is not adjusted within 360 days, it will be adjusted at the TT selling rate for the currency concerned and will be treated as a rupee advance.

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