Foreign Exchange
Banks extend export credits to their customers in two stages viz. (i) pre-shipment stage and (ii) post-shipment stage. The first stage of the loan is the pre-shipment stage where the loan is released for procuring, Packing processing (where necessary), manufacturing, and finally for packing of goods. The loans and advances so provided by the banks, to an exporter from procuring raw materials till the packing of finished goods is ready for export are called packing credit or pre-shipment credit. A Packing Credit facility is also available to service providers for the working capital requirement towards the rendering of services, to an overseas buyer.
Eligibility for Packing Credit facility:
Pre-shipment Credit (Packing Credit) is given to;
(a) The exporter who is holding the Importer–Exporter Code (IEC) Number allotted by DGFT.
(b) An exporter who has not been Caution Listed by RBI and on the Specific Approval List (SAL) of ECGC.
(c) An exporter who has an export commitment/order and has the capacity to fulfill the same
The packing credit facility is available both in loan form and cash credit form (Packing Credit facility in the form of a running Account). The size of the loan/limit and period of the loan is decided by the banks on the basis of the nature of the export and through confirmed export order through the letter of credit or firm order received by the exporters of good track record. In some special cases, lodgment of export orders or letter of credit may be waived by the banks depending on past experience and creditworthiness of the exporters
The packing credit can be availed both in Rupee and foreign currency (PCFC) loans. If packing credit is availed in foreign currency, the interest rate is linked to LIBOR. Packing Credit -Foreign Currency (PCFC) cannot remain outstanding beyond 180 days. If export does not take place even after 360 days PCFC should be converted to Rupee liability at the prevailing TT selling rate and banks are free to decide the interest to be charged to such accounts.
Repayment of Packing Credit loans:
Each packing credit granted by the bank is normally considered a separate account for the purpose of monitoring the period of loan release. The loan amount is liquidated out of proceeds of export bills purchased, discounted, or negotiated which will be treated as post-shipment credit. Repayment/liquidation of packing credit with the substitution of proceeds of other export documents may also be possible. This could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. Substitution of contract in this way is allowed only on the bank is satisfied that it is commercially necessary and unavoidable. Banks should also satisfy themselves about the valid reasons why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. The substitution of a contract is allowed when the exporter maintains the account with the same bank or it has the approval of the members of the consortium if any. Subject to certain conditions the exporter can also liquidate packing credit advance from his rupee resources to the extent exports have actually taken place.
Refinance to banks
Refinance is available for the Pre-Shipment advances granted to exporters by the banks from the Reserve Bank of India. The refinance is available for a maximum period of 180 days. If pre-shipment advances are not adjusted by the customer by submission of export documents within 360 days from the date of advance, the advance will ab-initio cease to qualify for the concessional rate of interest prescribed for export credit, and in such an event, banks are free to decide the rate of interest from the date of advance. If exports do not materialize at all, banks would charge on relative packing credit at domestic lending rate plus penal interest, if any, to be decided by the banks on the basis of policy approved by their Board.
Originally posted on November 9, 2013, edited and reposted on March 19, 2023
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