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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences

 PRE SHIPMENT CREDIT

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
 Contents

 Introduction
 Classification
 Packing Credit
 Eligibility
 Security

 Quantum of Finance

 Period/Interest Rate

 Running Account

 Advances against incentives receivable from Government

 Pre-Shipment credit in Foreign Currency(PCFC)
 Examples
 References
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Introduction

 Needed for:-
 Purchase of raw materials

 Components, processing cost

 Transportation

 Packing, packaging

 Warehousing

 Providing credit facilities to the importer

 ‘Buyer prefers that party who provides finance for
his purchase’

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Classification

1. Packing Credit
2.Advances against incentives receivable from
Government
3. Pre-Shipment credit in Foreign
Currency(PCFC)

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 1.1 Eligibility

 Confirmed Export Order or Irrevocable letter of

credit.
 Export/Trading/Star Trading/Super Star Trading
House or exporter.
 Exporter of services
 exporters of all the 161 tradable
 services covered under the General Agreement on Trade
in Services (GATS)
 Supplier/supporting manufacture of exporter
 Letter from export house indicating details

 Supplier and exporter will share the finance.

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 1.2 Form of Finance

 Fund Based
 Dependent upon the stage of execution of order

 Release loan from time to time

 Non Fund Based

 In the form of letter of credit

 Issue of various types of guarantee

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 1.3 Security

 Clean
 Raw material not acquired
 Secured
 Goods possessed, title acquired
 Goods pledged or hypothecated to bank
 Credit becomes secured

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 1.4 Quantum of Finance

 RBI guideline
 No export order should suffer from want of finance

 Should be adequate
 Domestic cost of production or FOB value of export

order, whichever is lower

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 1.5 Margin Requirement
 No fixed norms
 Ensure business sense and consciousness to the
exporter
 No intention to finance the profit component in the
export contract
 Export Credit Insurance Whole Turnover Packing
Credit (ECIB-WTPC)
 Protects banks against losses due to exporter‟s
default
 nominal guarantee fee, borne by the exporters.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 1.6 Period /Interest Rate

 Initially for 180 days

 According to production cycle
 90 days extension in
 „circumstances beyond exporters control’
 Revalidated export order or L/C.
 Concessional rate of interest as per RBI
 Less than the prime lending rate of the bank

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  No other service charges other than stipulated by
“Foreign Exchange Dealers Association of India”
 If found abusing the facility, commercial lending rate
ab initio.
 Premium paid to ECGC to be borne by exporter.

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
 1.7 Sanction of Packing Credit Limit

 Based on the assessment of the bank in respect of

credit needs.
 Separate packing credit loan account is opened for
every export order.
 Bank takes undertaking that:-
 Negotiation will be through the bank
 Account will be closed through these proceeds
 Receivables/duty drawback into that account

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 1.8 Closure of Packing Credit Loan

 Closed with realization of sale proceeds

 Balance not allowed to continue
 Transferred to another account
 Advances treated as post shipment finance
 As per compliance to ECGC .

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 1.9 Running Account Facility

 RBI permits even without export order/letter of credit

subject to:-
 Satisfaction of the bank
 Unblemished track record
 L/C order to be submitted within reasonable period.
 Not more than 180 days.
 EOUs, EPZs and SEZs.

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 1.10 Packing Credit under Red Clause L/C

 Credit at risk and responsibility of the Foreign Bank

establishing the L/C.

 Remains unsecured till hypothecation

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 2. Advances against Incentives

 Generally sanctioned at post shipment stages.

 Under exceptional circumstances
 Cost of production > FOB value of goods
 Subject to the conditions
 Covered under “Export Production Finance Guarantee of

ECGC”
 Advances repaid from proceeds of shipment and receipt

of incentives
 Premium paid to ECGC, borne by exporter

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 3. Pre Shipment Credit in Foreign

 To import the raw material to execute the export

contract
 Available in all foreign currencies US Dollars, Pound
Sterling, Japanese Yen, Euro, etc.
 No sanction without confirmed export order or
irrevocable L/C.
 Self liquidating in nature

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 3.1 Source of Funds for Banks

The foreign currency balances available with the bank

in
- Exchange Earners Foreign Currency (EEFC) Accounts,
- Resident Foreign Currency Accounts (RFC)
- Foreign currency (Non-Resident/Exporters)Accounts
- Escrow Accounts

Foreign Currency line of credit

 lines of credit with overseas banks (or other domestic banks) without the
prior approval of the RBI,
 provided the rate of interest on the line of credit does not exceed 1
percent above LIBOR/EURO LIBOR/EURIBOR.

 http://www.investopedia.com/terms/l/libor.asp
 http://www.diffen.com/difference/EURIBOR_vs_LIBOR

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 Examples

 http://www.federalbank.co.in/export-pre-shipment-

credit
 https://www.sbi.co.in/ibg/wholesale/project.htm
 http://www.icicibank.com/business- ban
king/
tradeservice/export-finance.html

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 References

 http://www.iibf.org.in/documents/export-credit.pdf
 http://www.Investopedia.com
 http://www.eximbankindia.in/?q=corporate-banking
 http://rbidocs.rbi.org.in/rdocs/notification/PDFs/2473

8.pdf

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 Questions??

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 THANK
YOU

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences