Page 96 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 5: Methods of Financing Exporters and Business Risk Management

5.1 Pre-shipment Finance Notes

Pre-shipment credit is provided to the exporters for meeting their need of getting the shipment
ready. It is generally offered as Packing Credit (PC). The exporter has to submit the prescribed
application form for obtaining packing credit together with the required papers to the bank. The
documents required generally are the export order, letter of credit, proof of business address,
financial papers like profit & loss account and the balance sheet. The bank thoroughly scrutinizes
the application and the attachments. Generally, a physical verification of the exporter’s business
premises is also carried out. The bank wants to make certain that the exporter has a financially
sound business background. In addition, the bank asks the exporter to provide collateral security/
guarantee to secure the loan. Banks these days extend packing credit only against firm export
orders backed by irrevocable confirmed letter of credit from a prime bank.

Banks also require the exporter to obtain an insurance cover from ECGC against payment risks.
The banks themselves also obtain financial guarantees from Export Credit Guarantee
Corporation and the exporter is required to bear the charges for the same.
The amount of PC extended normally will not exceed the FOB value of the export order. The
bank will also consider the domestic cost of production of a particular order. Banks also require
the exporter to contribute margin money to ensure his financial stake in the transaction as well
as not to finance his profits also. The bank’s own risk is also reduced to the extent of the margin
money and the exporter becomes personally responsible to the same extent. Each bank decides
its own margin requirements as there are no set rules for this.
The period for which PC is granted depends upon the situation in each case. The bank will
prepare its own estimate of the time required for completion of the particular order, as well as
pay attention to the shipment date. Out of the two, the earlier date normally defines the credit
period. The banks decide the repayment period keeping in view a maximum of 180 days as
prescribed by the RBI. In certain cases, where the production process is rather long, credit is
permissible for up to 270 days. If the credit remains outstanding beyond the specified time
period, interest is charged at the normal commercial lending rate, from the start date of the loan.
PC is normally operated as a separate account and the exporter is required to utilize the funds
only for transactions related to the particular export order. The bank closely monitors the
operation of this account to ensure proper use of funds designated for fulfillment of a certain
export contract.
The outstanding loan amount in a PC account has to be settled out of the proceeds of the
exported goods as soon as the documents drawn for the same are discounted. At this moment,
the pre-shipment loan actually gets converted into post-shipment credit.
Pre-shipment credit is extended in both Indian rupees as well as in foreign currency. The latter
is known as PCFC, that is, pre-shipment credit in foreign currency. This facility entitles the
exporter to borrow funds as pre-shipment credit in foreign currencies like US Dollar, Japanese
Yen, Pound Sterling or Euro. Such credit is offered at internationally competitive interest
rates to enable the exporter to take advantage of the same under stiff competitive environment.
These loans are extended at LIBOR/EURIBOR/EURO LIBOR interest rates. LIBOR stands for
London Inter-Bank Offer Rate which refers to the rate of interest at which banks are ready to
lend money to each other in London’s inter-bank market. LIBOR rates are the world’s most
widely used short-term interest rates. EURIBOR is Euro Inter-Bank Offered Rate, the rate
released by the European Banking Federation, used for euro inter-bank loan transactions
between banks in the euro region. EURIBOR is generally used as the underlying interest rate
for euro-denominated transactions. EURO LIBOR, as the name suggests, refers to Libor
denominated in euro.

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