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Export Finance

• Pre -shipment /Packing credit advance

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Export Finance

• The Export finance can be granted at two different stages:

• 1. Pre-shipment finance & • 2. Post –shipment finance

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Definition of Pre-shipment finance

• Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as Pre-shipment credit.

• Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports

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• Pre-shipment finance is available in the form of packing credit and advances against receivables from the Government like duty drawback, etc.

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Packing Credit• Pre-shipment finance which is generally called

packing credit is essentially a working capital advance made available for the specific purpose of procuring or processing or manufacturing of goods meant for export

• Two essential features of packing credit advances are:-

• There should be an export order or a letter of credit.

• The advances to be liquidated from the relative export proceeds.

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APPRAISAL• While appraising an export credit proposal as a

commercial banker, obligation to the following institutions or regulations needs to be adhered to.

• To RBI under the Exchange Control Regulations:-

• Obligations are:-• Appraisee to be the bank’s customer.• Appraisee should have the exim code number

alloted by the Director General Of Foreign Trade.

• Party’s name should not appear under the caution list of the RBI.

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APPRAISAL-contd

• To the Trade Control Authority under the EXIM policy:-• Obligations are:-• Appraisee should have IEC number alloted by the

DGFT.• Goods must be freely exportable i.e. not falling under the

negative list. If it falls under the negative list, then a valid license should be there allowing the export.

• Country with whom the appraisee wants to trade should not be under trade barrier.

• To ECGC:-• Obligations are:-• Verification that appraisee is not under the Specific

Approval list (SAL).

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SANCTION OF PACKING CREDIT ADVANCES

• There are certain factors to be considered while sanctioning the packing credit advances viz.

• Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower.

• Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business.

• Quantum of finance.• Standing of credit opening bank if the exports are

covered under letters of credit.• Regulations, political and financial conditions of the

buyer’s country

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Disbursement of advance • The packing credit will be disbursed in the form

of loan and each contract will have separate loan a/c. The aggregate position will be reflected in the loan ledger while each a/c will be opened in contract register

• It will be easier for the bank to monitor separate a/c. The calculation of interest for each contract will be convenient and easy.

• Running account facility may also be given to those exporters who continuously receive export orders or deal in seasonal commodity.

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DISBURSEMENT OF PACKING CREDIT

• After proper sanctioning of credit limits, the disbursing branch should ensure:-

• To inform ECGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction.

• To complete proper documentation and compliance of the terms of sanction i.e. creation of mortgage etc.

• There should be an export order or a letter of credit produced by the exporter on the basis of which disbursements are normally allowed. In both the cases following particulars are to be verified:-

• Name of the buyer• Commodity to be exported• Quantity• Value• Date of shipment / negotiation• Any other terms to be complied with.

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QUANTUM OF FINANCE

• On the basis of the above particulars, the quantum of finance will be fixed.

• Normally, the quantum will be fixed on the FOB value of the contract or the LC or the domestic value of the goods which ever is less after deducting the profit margin.

• If the contract or the LC is on CIF basis, the FOB value will be arrived at by deducting 13 to 14% from the CIF value if the despatch is through sea and around 25% if the despatch is by air. After arriving at the FOB value the usual margin i.e. profit margin stipulated in the terms of sanction to be deducted.

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PERIOD OF FINANCE• This is decided on the basis of the production

cycle or up to the date of shipment mentioned in the order / LC whichever is earlier.

• But in no case it should exceed 180 days.• For reasons beyond the control of exporter, if

the shipment could not be made within 180 days from the date of advance, a further extension of 90 days can be granted by the banks themselves without referring to Reserve Bank.

• Extension of any packing credit beyond 360 days requires ECGC’s approval.

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Monitoring

• Packing credit advance should also be followed up properly at all stages like submission of stock statements and inspection of stocks at regular intervals, adequate insurance cover for the stocks etc

• Packing credit advance will always be liquidated with the export proceeds of the relevant shipment. At this stage the pre-shipment liability of the party is converted into post-shipment liability

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Thank You