Pre-Shipment FinanceA pre requisite to avail of pre-shipment financing is that the Exporter should have acredit facility in place with a bank. Each bank has a credit process that determinesthe amount of funding the bank can give the company. 1. Who is eligible for pre-shipment credit? An exporter who holds an export order or Letter of Credit (LC) in his own name to perform an export contract can avail of pre-shipment credit. Banks may also grant pre-shipment advances without insisting on prior lodgment of LCs or purchase orders. This is known as the "Running Account Facility". 2. What is the purpose of this finance? Pre-shipment finance can be availed of only for the specific purpose of procuring raw materials / purchasing / manufacturing / processing / transporting / warehousing / packing and shipping the goods meant for export. 3. How much financing can I as an exporter get?This is ‘need based financing’, - which means that banks will lend an amount to youafter factoring in a particular margin (this margin is calculated as a percentage of thevalue of the order). The margin differs from bank to bank. Margins are stipulated forthe following reasons : to ensure that the exporter has some stake in the transaction to cover any erosion in the value of goods, and to ensure that there is no lending against the exporters profit margin.The banking practice is that the exporter can obtain 90% of the FOB value of theorder or 75% of the CIF value of the order. 1. What is the tenor of this funding? The RBI has allowed banks to grant this funding at a concession for a maximum period of 180 days. This period can be extended by the bank without referring to RBI for a further period of 90 days. Banks grant this extension in cases where the exporter faces genuine hardships in completing his order. If an extension is required beyond 270 days (i.e. 180+90 days), the RBI has the discretion to grant another (maximum) extension of 90 days. However, if the exports do not take place at the end of this period, the bank will charge interest from day one, at a rate left to the bank’s discretion.
2. In what currencys can the exporter obtain pre-shipment credit? Most often the pre-shipment borrowal is in the domestic currency, in the case of an exporter based in India, the Indian Rupee. However in some cases, the exporter may want to borrow in foreign currency because his product has a large import component or he finds the cost of borrowing in foreign currency lower than borrowing in the local currency. Borrowing in foreign currency is feasible when the cost of Rupee borrowing (less the currency premium) is greater than the cost of borrowing in the foreign currency. This is discussed in greater detail in " when does foreign currency risk arise?" This will be easier to understand with the help of an example. Let us assume that an exporters’ exports and imports are both payable in US Dollars. Let us also assume that the import component is significant at, say, 70%. In this case, the exporter is open to the effects of currency movements both at the time of import, and then at the time of export. Borrowing in USD can hence partially hedge his currency risk on the export side, since his exports are also going to be in the same currency. The above facility, allowed to exporters to avail of pre-shipment credit in foreign currency, is termed as ‘Pre-Shipment Credit in Foreign Currency’ or PCFC. 3. What is the cost of pre-shipment finance ? Pre-shipment credit : Upto 180 days - 10% Between 180 –270 days - 13% Over 270 days - Commercial rates which are likely to be higher than the rate applicable upto 270 days. USD Lending (PCFC) - Maximum of Libor + 1.5 pct 4. What are the ways in which I can liquidate the pre-shipment finance ?The pre-shipment facility can be liquidated by proceeds of export bills negotiated,purchased or discounted. As far as possible, banks dont encourage liquidation bydebit to cash credit account.Another interesting thing is that, once the goods are shipped out and documentstendered to the bank, the pre-shipment advance is converted to post-shipmentadvance.In the case of PCFC credit, pre-shipment finance is liquidated by discounting billsunder the ‘Rediscounting of Export Bills Abroad’ scheme. PCFC can be liquidated by
discounting of export bills, or by grant of foreign currency loans by a bank. Once theexporter avails of PCFC, he will not be eligible for post-shipment credit in rupees; hewill have to avail of post-shipment funding in the same currency in which he availedof the pre-shipment funding.
Post Shipment FinancePost-shipment finance is a loan or advance granted by a bank to an exporter ofgoods from India. This facility is available to an exporter subsequent to the date ofshipment of goods upto the date of realisation of export proceeds.Some key features of post-shipment finance are as follows: Finance is extended to either the exporter (sellers credit) or the overseas buyer of the goods (buyers credit). Finance is extended against evidence of shipping documents. Concessive rate of interest is available for a maximum period of 180 days, starting from the date of submission of documents. Normally, the documents are to be submitted within 21days from the date of shipment.Post-shipment finance can be further classified as under : a. Negotiation of export documents under Letter of Credit (LC). b. Purchase / Discount of export document under confirmed orders / export contracts, etc. c. Advances against export bills sent on collection basis. 1. Who is eligible for post-shipment finance? Post-shipment finance is extended to the actual exporter who has exported the goods or to an exporter in whose name the export documents are transferred. 2. On what basis is post-shipment finance extended? It is extended against evidence of shipment of export goods. 3. What is the purpose of post-shipment finance? Post shipment finance is meant to finance export receivables. 4. What is the quantum of this finance? Post shipment finance can be extended upto 100% of the invoice value of goods. 5. 6. What is the period for which this funding is available? In the case of routine exports, the maximum period allowed for realisation of export proceeds is 6 months from the date of shipment. Banks can extend post shipment finance at a lower interest rate upto the normal transit period or
the notional due dates (this is calculated as the sum of the Normal Transit Period + Usance Period, subject to a maximum of 180 days). Beyond that period, banks lend at non-concessive rates or the normal commercial rates. 7. What are the applicable rates of Interest?Post-shipment creditSight Bills - Not more than 10%Upto 90 days - Not more than 10%91 days upto 6 months - 12%Overdue (applicable only on the overdue portion) - Left to the discretion of the bank,though it is most likely to be the unarranged overdraft rate.Post-Shipment foreign currency loan - Maximum of Libor + 1.5 pct