What is Pre - shipment credit?
When an exporter avail any credit facilities, in the form of loan and or advance from a bank for the purpose of financing the purchase of inputs packing material for manufacturing and packing of the final products to be exported it is called Pre –Shipment Credit.
Generally, the bank approves the pre - shipment credit on production of copy of irrevocable letter of credit opened by the overseas buyer in favour of the exporter or copy of valid export order.
The exporters can have credit facilities in the following form:
- to avail export finance at pre shipment stage in rupees and then post shipment credit either in rupees or in foreign currency.
to avail pre-shipment credit in foreign currency and discount the export bills in foreign currency at post shipment stage.
With a view to provide the PCFC at internationally competitive rate of interest to the exporters to reduce cost of inputs and packing material for purchasing from the domestic as well as international market and make their final product internationally competitive. The authorised dealers have been permitted to finance at LIBOR/EURO LIBOR/EURIBOR.
Currency of Finance
PCFC can be financed in any freely transferable Currency as per permission of Reserve Bank of India. However, presently the PCFC is granted in US Dollar, EURO, and GBP subject to availability of fund.
PCFC can be extended in the currency other than export currency. For example A Ltd has received export order from Manila Philippines in US Dollar however A Ltd has availed PCFC in EURO. In such case any risk between US Dollar and EURO, which is called cross currency risk, and cost will be on the exporter. PCFC can also be extended to Asian Currency Union (ACU) countries.
The credit limit of PCFC will be sanctioned in both INR and Foreign Currency on the basis of assessment that will be done in INR based on working capital cycle including at pre shipment and post shipment as per the existing methods however, the foreign currency part of it will be work out on the basis of latest available FEDAI rate.
Period of Credit:
PCFC, as in the case of Rupee-shipment credit is initially available for a specified period as may be decided by sanctioning authorities after taking in to consideration relevant factors with a maximum period of 180 days and branches should monitor the end use of the credit as in case of Rupee credit.
Advance granted under the PCFC must be utilised for export purpose only the same should not be diverted for domestic purpose.
Rate of Interest:
The rate of interest on PCFC is based on ongoing LIBOR/EURO LIBOR/EURIBOR for the appropriate period at the time of advance plus sanctioned spread. A category of branches distributes PCFC on ongoing LIBOR/EURO LIBOR/EURIBOR normally available for standard period of 1,2,3,6 or 12 months. While B category branches distributes PCFC at the rate obtained from Treasury Branch Mumbai.
The rate of interest is to be charged on PCFC availed of at the rate agreed at the time of disbursal. However, the rate of interest may be changed in tune with the movement in LIBOR/EURO LIBOR/EURIBOR. The rate of interest therefore may differ for each drawal if drawls is in tranches.
On any earlier outstanding loans, the rate of interest would be the rate originally fixed at the time of drawls. Bank may avail line of credit from any bank outside India for funding PCFC. In such case withholding tax as may be applicable will be passed on to the borrower.
Expiry of Contract/Letter of Credit- Extension of Overdue advances
The period of PCFC can be extended subject to the underlying export order / letter of credit is valid. Extension up to 180 days can be granted by the Head of Branch by sending a written request of the exporter for extension with copy of valid export order or letter of credit. If any extra cost is incurred by the bank in funding the extension the same should be recovered from the exporter. However, no gains are to be passed on to the borrower.
Any extension beyond 180 days and up to 270 days may be granted at the option of the branch after approval of the Regional Office, subject to the underlying export order / letter of credit is valid for shipment. Extension beyond 270 days up to 360 days may be granted only under exceptional circumstances after obtaining necessary approval of the Regional office. In case of extension beyond 180 days the rate of interest will be the rate of interest initial period of 180 days prevailing at the time of extension plus 2% or applicable rate.
If no export is effected within 360 days the PCFC should be adjusted at the TT selling rate. In case of cancellation of export order, PCFC should be liquidated by selling equivalent amount of foreign exchange at TT selling rate prevailing on the date of liquidation and interest recovered on the rupee equivalent of the principal amount at the rate for Packing Credit adjusted not in an approved manner plus commission @ 0.125% or applicable rate.
Margin on PCFC advances should be as per sanction terms. Actual margin to be maintained is margin as per sanction terms or EEFC components, whichever is higher. At the time of fixing margin it must be ensured that there is enough margins available to cover the discount/interest on Foreign Currency bills discounted at the post shipment stage.
Amount of Credit
For operational convenience, amount advanced under PCFC are restricted to a specified minimum which may be fixed as per requirements.
Export Credit Guarantee Corporation (ECGC) cover
For availing PCFC for export to some countries of which track records are bad in remittance of export proceeds or which are in the restricted countries list of ECGC the banks may ask for Whole Time Packing Credit Guarantee (WTPCG) ECGC cover. The coverage is available in Rupees.
Forward contract may be booked for drawal of PCFC from the date of Letter of credit or export order to date of availment of PCFC in any of the convertible currency including forex portion to meet imported input cost.
Excess production cost over FOB value of Export Contract
Sometimes it may happen particularly in case of Agro products that the Packing Credit required in excess of the FOB value ( Free On Board value).The PCFC would be available only up to the exportable portion of the product as the export bill/invoice tendered to the buyer will be inadequate to liquidate the excess advance. The bank can grant Rupee Packing Credit (RPC) to cover the excess portion of cost over the FOB value of the product. The RPC is granted keeping sufficient margin as per the sanction terms and shall be adjusted out of sale within the stipulated time say 30 days from the date of advance.
Sharing of PCFC between Merchant exporter and Manufacturer
The rupee export credit finance may be shared between the Merchant exporter ie holder of export order and Manufacturer of the goods to be exported. The bank may extend the facilities to the manufacturer only after receipt of the disclaimer from the holder of the export order. The repayment of the PCFC granted to the manufacturer by transfer of foreign currency from the export order holder availing PCFC by discounting of bill. It should be ensured that there should not be double financing involved in the transaction and total period of the packing credit is limited to the actual production cycle of the goods actual exported.
The sharing facilities may be extended where the banker or the lead banker in case of consortium finance is the same for both export order holder and the manufacturer. Notwithstanding that the banker of both the parties export order holder and the manufacturer are different the sharing facilities may be possible if the concerned banks agree to such an arrangement .The sharing of the export benefits left to the mutual agreement between the export order holder and the manufacturer.
PCFC for supplies from one EOU,EPZ,SEZ unit to another EOU,EPZ,SEZ
PCFC may be made available to both supplier EOU,EPZ, SEZ and receiver EOU,EPZ,SEZ. The buyer will have the PCFC after receipt of goods from the supplier. The PCFC availed by the buyer will be distributed by its Banker by transferring the foreign currency fund to the supplier for liquidating the PCFC availed by the supplier unit. The buyer will avail post shipment finance after effecting and liquidating the PCFC availed .
PACKING CREDIT GUARANTEE
What is Packing Credit guarantee?
The main aim of any lender is to lend money to earn interest have the principal money returned immediately after the terms of lending expires. Which mean any lender wants cent per cent safety of the money lent.
When packing credit is lent by a bank the repayment of the Pacing credit solely is on the export performance of the borrower till the borrower defaults. If the borrower defaults the recovery will be made through different way.
It is very difficult for the relatively new exporter to have Packing Credit Facilities available that too pre shipment which is very essential for the new exporters. Export Credit Guarantee Corporation (ECGC) provides Packing Credit Guarantee with a view to have better facilities of packing credit from Banker of the borrower.
ECGC provide guarantee that if the realisation of export of the for which PCFC has been given is not realised, ECGC will make good the export realisation and pay money to the PCFC lender on behalf of the exporter. So ECGC will make good a considerable portion of loss of the lenders.
Which loans and advances are eligible for Packing Credit Guarantee?
Any loan given to an exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order or Letter of Credit qualifies for Packing Credit Guarantee.
Pre-shipment advances given by banks to parties who enter into contracts for export of services or for construction works abroad to meet preliminary expenses in connection with such contracts are also eligible for cover under the Guarantee. The requirement of lodgement of Letter of Credit or export order for granting packing credit advances is waived if the bank grants such advances in accordance with the instructions of the Reserve Bank of India in that respect.
What are the general conditions regarding Packing Credit Guarantee?
The Guarantee is issued for a period of 12 months based on a proposal from the bank, covers all the advances that may be made by the bank during the period to an individual exporter within an approved limit. The bank is required to submit monthly declarations of advances and repayments and to pay premium at the rate of 13 paise per Rs.100 per month on the highest amount outstanding on any day. Approval of ECGC has to be obtained if the period for repayment of any advance is to be extended beyond 360 days from the date of advance. If the bank apprehends a loss, it is required to call back the outstanding advances and to take suitable action to prevent or to minimize the loss including any action that may be suggested by ECGC. The bank will be entitled to claim 66 2/3% of its loss from ECGC if the entire amount due from the exporter is not recovered within a period of four months from the due date of repayment. The claims are payable if ECGC is satisfied that the bank had conducted the account with normal banking prudence and has also complied with the terms and conditions of the Guarantee. Any amount that is recovered by the bank after the settlement of the claim has to be shared between the Corporation and the bank in the same ratio in which the loss was originally borne by them.
What is the Whole-turnover Packing Credit Guarantee available to banks and what are its advantages?
ECGC issues Whole-turnover Packing Credit Guarantee (WTPCG) to banks which undertake to obtain cover for packing credit advances granted to all its customers on all-India basis. In consideration of the large volume of business offered for cover and the spread of risks that will thus become available to it, the Corporation grants a higher percentage of cover, lower premium rate and considerable reduction in procedural formalities.
What are the premium rates applicable for WTPCG and what is the extent of cover provided by it?
A differential premium rate is now applicable for the banks, which have opted for WTPCG. The rates vary between 7 paise to 10 paise per Rs.100 per month payable on the average outstanding for the month. The rate for each bank is fixed based on the actual claim premium ratio for the bank for the period of immediately preceding five years. The percentage of cover is normally 75% for most of the banks (except a few banks for which it is 65%, taking into account the extremely high claim premium ratio of those banks). There is a reduction of 10% in the cover if the total advance sanctioned to any particular exporter exceeds the total premium received from the bank (for all the accounts put together) in the immediately preceding year; even in respect of such exporters, the lower percentage of cover will apply only for the advances sanctioned over and above the value of such total premium.