What is Pre-shipment or packing credit?
Pre-shipment credit means any loan or advance granted by a bank to an exporter for financing the purchase, processing. manufacturing, or packing of goods prior to shipment. It is also known as packing credit. As the ultimate payment is made by the importer, his/her creditworthiness is important to the bank.
Banks often insist upon the L/C or a confirmed order before granting export credit. The banks reduce the risk of non-payment by the importer by collateral or supporting guarantee.
Period of advance: The period of packing credit given by the bank varies on a case to case basis, depending upon the exporter’s requirement for procurement, processing, or manufacturing and shipping of goods. Primarily, individual banks decide the period of packing credit for exports.
However, the RBI provides refinance to the banks only for a period not exceeding 180 days. If pre-shipment advances are not adjusted by submission of export documents within a period of 360 days from the date of advance, the advance cease to qualify for concessive rate of interest ab initio. Banks may release the packing credit in one lump sum or in stages, depending upon the requirement of the export order or L/C.
Liquidation of packing credit: The pre-shipment credit granted to an exporter is liquidated out of the proceeds of the bills drawn for the exported commodities on its purchases, discount, etc., thereby converting pre-shipment credit to post-shipment credit.
The packing credit may also be repaid or prepaid out of the balances in Exchange Earners’ Foreign Currency (EEFC) Account. Moreover, banks are free to decide the rate of interest from the date of advance.
Running account facility: Generally, pre-shipment credit is provided to exporters on lodgement of L/Cs or firm export orders. It has also been observed that in some cases the availability of raw material is seasonal whereas the time taken for manufacture and shipment of goods is more than the delivery schedule as per the export contracts in others.
Besides, often the exporters have to procure raw material, manufacture the export products, and keep the same ready for shipment, in anticipation of the receipt of firm export orders or IVCS from overseas buyers. In view of these difficulties faced by the exporters in availing the pre-shipment credit in such cases, banks are authorized to extend pre-shipment credit ‘running account facility’.
Such running account facility is extended in respect of any commodity without insisting upon prior lodgement of a firm export order or an IVC depending upon the bank’s judgment.
Pre-shipment credit in foreign currency: To enable the exporters to have operational flexibility, banks extend pre-shipment credit in foreign currency (PCFC) in any one of the convertible currencies, such as US dollars, pound sterling, Japanese yen, euro, etc., in respect to an esport order invoiced in another convertible currency.
For instance, an exporter can avail of PCFC in US dollars again an export order invoiced in euro. However, the risk and cost of cross-currency transaction are that of the exporter.
Under this scheme, the exporters have the following options to avail export finance:
- To avail of pre-shipment credit in rupees and then the post-shipment credit either in rupees or discounting/re-discounting of export bills under Export Bills Abroad (EBR) scheme
- To avail of pre-shipment credit in foreign currency and discount/rediscounting of the export bills in foreign currency under EBR scheme
- To avail of pre-shipment credit in rupees and then convert at the discretion of the bank
Banks are also permitted to extend PCFC for exports to Asian Currency Union (ACU) countries. The applicable benefit to the exporters accrues only after the realization of the export bills or when the resultant export bills are rediscounted on ‘without recourse’ basis. The lending rate to the exporter should not exceed 1.0 percent over LIBOR, EURO LIBOR, or EURIBOR, excluding withholding tax.
IMPORTANT LINK
- Institutions Providing Finance and Credit Facility for Foreign Trade
- What is Risk Analysis?
- Explain Political risks in detail? and its Types
- What are the types of Risks. Explain in detail?
- Meaning and Types of commercial risks
- How can we minimize foreign trade risks?
- What are Arbitrage operations?
- Difference between Spot Market and Forward Market
- What is spot exchange?
- Stability of Exchange Rate- Facts, significance, method, theories & warning
- Main Items Debit and Credit sides of the Balance of Payment
- Differences between Educational Administration and General Administration
- General Administration and Educational Administration
- Nature of Educational Administration
- Scope of School Administration
- Definitions of Educational Administration by Different Scholars
- Definitions of Educational Administration by Different Scholars
- Meaning of Educational Administration
- Principles of School Organisation and Administration
- Aims and Objectives of School Organisation
- School Organisation | Meaning of School Organisation | Meaning of School |Meaning of Organisation
Disclaimer