Trade Financing in import-export

7/28/2019 Trade Financing in import-export

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EXPORT FINANCING

By

HAMMAD MOHAMMED

PRE-SHIPMENT & POST-SHIPMENT FINANCE


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The assistance provided to the exporter beforeshipment of goods is known as pre-shipmentfinance." It is provided for working capital needsto:

The purchase of raw material

Processing

Packing

Transportation

Warehousing

Meet other financial cost of business

PRE-SHIPMENT FINANCE - DEFINITION &

OBJECTIVES


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Pre-shipment finance is extended in the following forms :

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

PRE-SHIPMENT FINANCE - FORMS


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Packing credit is normally granted on secured

basis.

Sometimes clear advance may also be granted.

These advances are clean at their initial stagewhen goods are not yet acquired.

Once the goods are acquired and are in the custody

of the exporter, banks usually convert the clean

advance into hypothecation or pledge

PACKING CREDIT BASIS


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Available to merchant exporters or export houses,

manufacturer exporters, manufacturers of goods

supplying to Export Houses

An exporter should usually hold an export order orletter of credit in his own name to perform anexport contract.

Exporter should not be in the caution list of RBI

Running Account Holders are also eligible to thisfacility

ELIGIBILITY FOR PACKING CREDIT


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The RBI has permitted banks to grant packing creditadvances even without production of L/C or firmorder/ contract under this scheme Facility subject tothe following conditions :

The facility may be extended, provided the need forRunning Account Facility has been established by theexporters to the satisfaction of the bank

The banks may extend this facility only to thoseexporters whose track record has been established tothe satisfaction of the bank.Contd.

RUNNING ACCOUNT FACILITY


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L/C or firm order is produced within a reasonable period of time.

For commodities under selective credit control, banks should insiston production of L/Cs or firm orders within one month from the dateof sanction.

Packing credit may also be given under the Red Clause letter ofcredit. The credit is given at the instance and responsibility of the foreign bank

establishing the L/C.

Here, the packing credit advance is made against a simple receipt and isunsecured

RUNNING ACCOUNT FACILITYC O N T D .


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Before any sanction is made, banks need tocheck aspects like

product profile,

political and economic details about country,status report of the prospective buyer

Banks can seek the help of institutions likeECGC or international agencies like Dun and

Bradstreet etc. contd

APPRAISAL & SANCTION OF LIMITS


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Whether the exporter is a regular customer, a bona

fide exporter and has a good standing in the

market.

Whether the exporter has the necessary licenseand quota permit or not.

Whether the country with which the exporter wants

to deal is under the list of Restricted Cover

Countries (RCC) or not.

ECGC classifies the countries into seven categories

in the ascending order of risks perceived

APPRAISAL & SANCTION OF LIMITS CONTD


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Basically depends on the export order & the creditrating of the exporter by the bank

Generally the amount of packing credit will notexceed FOB value of the export goods or their

domestic value whichever is less. The usual banking practice is to extend up to 90% of

the FOB value of the order or 75% of the CIF value ofthe order.

Sometimes it can be to the extent of domestic value

of the goods even though such value is higher thantheir FOB value, provided the goods are entitled toduty draw back and the expor ter is covered by theExport Production Finance Guarantee of the ECGC.

THE AMOUNT OF PACKING CREDIT

EXTENDED


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Banks decide the period for which a packingcredit advance may be given

Relevant factors are considered so that theperiod is sufficient to enable the exporter toship the goods / render the services.

Pre-shipment advances should be adjustedby submission of export documents within270 days & max 360 days from the date of

advance

THE PERIOD OF FUNDING


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The Base Rate System is applicable from July 1 ,

2010 and accordingly interest rates applicable for all

tenors of rupee export credit advances sanctioned onor after July 01, 2010 are at or above Base Rate.

Different banks have fixed different pre -shipment

interest rate on export credit on this basis.

COST OF PRE-SHIPMENT FINANCE


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Packing Credit Advance needs be liquidated out ofthe export proceeds of the relevant shipment,thereby converting pre-shipment credit into postshipment credit.

If exports do not materialize at all, then the entire

advance can be recovered and charged on relative

packing credit domestic lending rate plus penal rate

of interest to be decided by the banks

RBI has allowed some flexibility into this regulationunder which substitut ion of commodity or buyer canbe allowed by a bank without any reference to RBI.

LIQUIDATION OF PACKING CREDIT

ADVANCE


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PCFC is available to exporters for domestic and

imported inputs of exported goods at LIBOR related

rates of interest as decided by RBI.

From Nov 11, the rate has been revised to LIBORplus 350 basis points, till March 31, 2012.

The scheme is an addit ional window for providing

pre-shipment credit to Indian exporters at

internationally competitive rates of interest.

contd

PRE-SHIPMENT CREDIT FOREIGN

CURRENCY (PCFC)


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The exporters/export houses with a good trackrecord can avail of a running account facilitywith the Bank for PCFC.

To qualify for this purpose, the exportersoverdue bill should not exceed 5% of theaverage annual export realization during thepreceding three years.

PRE-SHIPMENT CREDIT FOREIGN

CURRENCY (PCFC) C O NT D


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In case of cancellation of export order, the PCFC can be

closed by selling equivalent amount of foreign exchange at TT

selling rate prevalent on the date of liquidation.

The forward covers can be booked in respect of future PCFCdrawings.

KEY BENEFITS OF PCFC


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The corporations/exporters having firm export

orders or confirmed L/C are eligible for PCFC,

provided they satisfy other credit norms of the

Bank.PCFC is to be repaid with the proceeds of the

export bill submitted after shipment.

Multi-currency drawings against the same orders

are not permitted due to operationalinconvenience. contd

TERMS & CONDITIONS - PCFC


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Cross-country drawings are restricted to USdollars.

In case, the export order is in a non-

designated currency like Swiss Franc etc.PCFC will be given only in US$.

For orders in Euro, Pound Sterling and JPY,PCFC can be availed in the respective

currencies or US$ at the choice of exporter.

TERMS & CONDITIONS PCFC C O N T D


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Post Shipment Financing


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Time gap between shipment of goods and

collection of export proceeds

Time consumed in process of preparing documents,

submitting them to the bank and then forwardingof them by the bank

Includes a minimum time period of 25 days

To bridge this gap commercial banks provide post

shipment financing

NEED FOR POST SHIPMENT FINANCING


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A kind of loan provided by a financialinstitution to an exporter or seller against ashipment that has already been made.

This type of export finance is granted from thedate of extending the credit after shipment ofthe goods to the realization date of theexporter proceeds .

WHAT IS IT?


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Post -shipment finance can be secured or unsecured.

Since the finance is extended against evidence ofexport shipment and bank obtains the documents oftitle of goods, the finance is normally self liquidating.

Can be extended up to 100% of the invoice value ofgoods.

Can be of shor t term or long term, depending on thepayment terms offered by the exporter to the overseasimporter.

Concessional rate of interest is available for amaximum of 180 days from the date of surrender ofdocuments.

THE FEATURES


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Export Bills negotiated

Advance against export bills sent on collection

basis.

Advance against export on consignment basis

Advance against claims of Duty Drawback.

TYPES OF POST-SHIPMENT FINANCE


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Thank You

Documents

Trade Financing in import-export