Pre-shipment & Post-shipment

    Pre-shipmement and
            Post-shipment

žAn exporter, like any other businessman, needs money to continue operating in business.

žExport business is generally based on credit terms

›the exporter ships the goods and the payment is realized at a later date, till the period his funds are blocked.

žIn order to support the exporter from the problem of lack of finance the commercial banks provides finances to him at two distinct stages

–pre-shipment stage

–post shipment stage.

Pre-shipment Finance

§Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit.

§Pre-shipment finance facilities offer liquidity to the exporter.

§Pre-shipment finance is generally provided for the following purposes :

–Procurement/purchase of raw material

–Production

–Processing

–Packing

–Warehousing

–Transportation

Importance Pre-shipment Finance

žTo purchase raw material, and other inputs to manufacture goods.

žTo assemble the goods in the case of merchant exporters.

žTo store the goods in suitable warehouses till the goods are shipped.

žTo pay for packing, marking and labeling of goods.

žTo pay for pre-shipment inspection charges.

žTo import or purchase from the domestic market heavy machinery and other capital goods to produce export goods.

žTo pay for consultancy services.

žTo pay for export documentation expenses.

Eligible Parties

•An exporter with an export order or an LC in his own name who will actually perform the act of exporting.

•Supporting manufacturer, provided the exporter gives a letter stating the particulars of an export order or LC and states that he is not going to avail of export finance.

•

žAs in the case of any other advance, the bank takes into consideration a number of factors before making the necessary advance to the exporter namely,

›Honesty, integrity and capital of the borrower,

›Exporter’s experience in the line,

›Security offered, (Treasury stock,common stocks)

›The rate of interest,

›The bank’s experience about the exporter and

›Standing of the foreign buyer.

žThe security can be provided in the following form:

›Letter of credit,

›Confirmed order as evidence of having received an order

›Relevant policy issued by ECGC.

Personal bond in the case of the party already known to the banker

Process of Availing Pre-shipment Finance

•An application for pre-shipment advance should be made by the exporter to its bank along with following documents :

–Conformed (Complying) export order or LC in original.

–An undertaking that the advance will be utilized for the specific purpose of procuring/manufacturing/shipping etc. of goods meant for export only, as stated in the relative conformed export order or the LC.

–Copy of IEC number (Importer Exporter Code).

–Copy of valid RCMC (Registration Cum Membership Certificate).

–Appropriate policy/guarantee of the ECGC.

–Copies of Income Tax/Wealth Tax Assessment Order for the last 2/3 years in case of sole proprietary and partnership firm.

–Any other documents required by the bank

METHODS OF PRE-SHIPMENT FINANCE

. Cash Packing Credit Loan (revolving credit):

    In this type of credit, the bank normally grants packing credit advances initially on unsecured basis (not connected to property). Subsequently, the bank may ask for security (collateral).

2. Advance against Hypothecation:

    Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothetication deed in favour of the bank.

. Advance against Pledge:

    The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter.

4. Advance Against Red L/C :

    The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit. 

Period of Finance

ž1 - 80 days -----> PLR - 2.5%

ž     80 - 270 days -----> PLR – 3.0%

ž     270 - 360 days -----> commercial rate of           interest

ž

žIf export is not completed upto 360 days banks can determine the rate which would become leviable from the first day itself.

žPacking Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting pre-shipment credit into post-shipment  credit.

Post-shipment Credit 

žOnce the exporter has shipped the goods, there will always be a time gap between the date of shipment and receipt of payment.

žPost-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.

žPost shipment finance is provided at concessional rates as per RBI guidelines.

›The proof of shipment of goods, serves as the basis of grant of such facility.

IMPORTANCE OF POST-SHIPMENT FINANCE

•To pay for port authorities, customs and shipping agents charges.

•To pay towards export duty or tax, if any.

•To pay towards ECGC premium.

•To pay for freight and other shipping expenses.

•To pay towards marine insurance premium, under CIF contracts.

•To meet expenses in respect of after sale service.

•To pay for publicity and advertising in the overseas markets.

•To pay for publicity and advertising in the overseas markets.

•To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad.

•To pay for representatives abroad in connection with their stay board.

Export bills negotiated under L/C :

    The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.

2. Purchase (Securing) of export bills drawn under confirmed contracts: 

    The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.

3. Advance against bills under collection :

     In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.

4. Advance against claims of Duty Drawback (DBK) :

    DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as post-shipment advance against claims for DBK.

Period of Finance

žThe rate of interest on post-shipment credit is

žUp to 90 days not exceeding 10 %.

žBeyond 90 days and up to six months from the date of shipment- 12 %

ž beyond 6 months from the date of shipment, banks are free to charge any interest.

žRepayment of the loan will generally take place when proceeds are received from abroad.