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Unit 5: Methods of Financing Exporters and Business Risk Management

When the exporter has sufficient drawing power available within his overall limit to Notes
accommodate the proposed PCFC advance, PCFC is made available to him either in
foreign currency for payment of his import bills or in Indian rupees for purchase of
domestic raw material by converting the foreign currency of PCFC at T.T. buying rate.
PCFC is operated like cash credit account with balances in foreign currency. The liability
of the exporter to the Bank on account of PCFC is in foreign currency. The rupee equivalent
will be shown in the account only at notional rates which really does not concern the
exporter. Interest on PCFC will be arrived at in foreign currency and the rupee equivalent
thereof will be recovered at quarterly intervals from the exporter’s CC or current account.

Source: www.statebankofindia.com
5.1.1 Advances against Duty Drawback/Incentives

Banks may also extend loans prior to shipments against the drawback/incentives receivable
from the government covered by ECGC guarantee in certain exceptional cases. This type of
advance is normally extended after the goods have been shipped. The exporter will have to
present his case as a special one to the satisfaction of the bank. The bank in its own discretion
may advance a loan for up to 90 days at any interest rate within the ceiling of BPLR (Benchmark
Prime Lending Rate) minus 2.5%.

5.2 Post-shipment Export Advance

Once the exporter has shipped the goods, there will always be a time gap between the date of
shipment and the date of receipt of payment. Post-shipment credit refers to the facilities extended
by the banks to the exporter during this period to enable him to tide over his financial needs. It
also includes any loan or advance granted by the bank to the exporter against any drawback or
other export incentives receivable, permitted by the government. Post-shipment loan runs from
the date of extending credit, after shipment of goods to the date of realization of export proceeds.
It infuses funds into the business even before the actual payment has been received, thus easing
the cash flow. The exporter is in a position to obtain funds for the shipped goods without
waiting for the buyer to make the payment.

Post-shipment finance is provided at concessional interest rates as per RBI guidelines. The proof
of shipment of goods, serves as the basis of grant of such facility. The basic purpose of this credit
is to finance export receivables. Normally, the exporter who has exported the goods is eligible
to apply for this facility. Alternatively, the exporter to whom the export documents have been
transferred, can apply for this credit.
Post-shipment finance can be granted up to 100% of the invoice value although the normal
practice is to give 90%. This credit gets liquidated by the proceeds of export bills received from
overseas in respect of the exported goods.
The exporter has the choice to avail post-shipment credit either in Indian rupees or in foreign
currency. However, if the exporter has availed the pre-shipment credit in foreign currency, the
post-shipment credit has to be essentially in foreign currency since pre-shipment credit has to be
liquidated in foreign currency. Under Export Bill Re-discounting (EBR) scheme, for post shipment
finance at international rates of interest, PCFC will be liquidated with the discounting of bills.
The foreign currency of the bill will be applied to PCFC in foreign currency and if there is any
surplus of the bill after adjusting to PCFC, the surplus portion will be converted into Indian
rupees and credited to the exporter’s CC or current account. The EBR advance, which is a foreign
currency loan, will be eventually closed when the overseas buyer pays the bill and the export
proceeds are realised.

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