Role of Banks in Export Financing- Pre-Shipment Finance - Management Duniya

Role of Banks in Export Financing- Pre-Shipment Finance

In order to boost export trade, the following forms of credit facilities are granted to Export Oriented Units (EOUs) in the agriculture Industry. Agriculture exports constitute 13% of India’s merchandise export basket, and thus arises the need for this industry to be given monetary support in the following form:

3.1(a)Pre-Shipment Finance

This is the credit given to the exporter before he ships the consignment in accordance with the order given by the importer, for the purchase of raw materials and for processing them into exportable goods, packaging, transportation and warehousing of goods. There are two ways to obtain finance at the pre-shipment stage:

• Anticipatory Letter of Credit:

The exporter can get the importer to provide him with pre-shipment finance, by establishing an Anticipatory Letter of Credit also known as Red Clause Letter of Credit through the importer’s banker in his favor. Such a Letter of Credit provides for either an immediate payment to exporter of full or part amount of the credit against the delivery of specified documents. It stipulates the conditions which the exporter must fulfill before he is entitled to receive any advance payment, such as:

• Credit to be utilized only for the purchase of necessary raw materials


• Shipping documents to be presented to the bank for negotiation before a specified date.

• Export Packing Credit (EPC):

It is the credit provided by a bank to an exporter on the basis of a Letter of Credit opened in his favor or against an irrevocable order for the export of goods from India by the importer. Working capital requirements are appraised on the basis of the Holding Period Ratios, Activity and Turnover Ratios. Margins are set on a low scale (10-15%). Exporters must ensure that the pre-shipment credit is to be adjusted by submission of export documents within 360 days from the date of advance, failing which concessive credit facility would not be available ab initio.

 Packing credit should be maintained as a separate account so as to facilitate proper monitoring of the end-usage of funds. Any outstanding balance in such accounts must be backed by bona fide export documents. In case of exporters of repute, banks would grant advances without lodging of LCs or copies of confirmed contracts against minimum information:

• Importer’s name


• Contract Value


• Particulars and Quantity of goods


• Shipment date


• Terms of Contract

RBI has prescribed these steps in the Running Account facility introduced in the context of export trade.

 Pre-shipment Credit in Foreign Currency (PCFC)

Where Packing Credit is granted in foreign currency at interest rates prevailing in the international markets (generally linked to the 6 months LIBOR), it is popularly known as PCFC. This is ideally meant to meet the procurement requirements of both domestic and imported inputs. Exporters resort to this mode of finance when the Rupee does not show a depreciating trend in comparison to the currency in which the credit is denominated. The rationality being that the exporter would have to shell out more in Rupee terms at the time of repayment of the PCFC loan which hampers profitability. Ideally, this is availed by units located in SEZs. The Conditions regarding the eligibility of exporters for running account EPC facility is applicable to PCFC.

Exporters availing PCFC have to discount their export bills under Export Bills Re-discounting Abroad Scheme (EBR) to repay the outstanding amount in foreign currency.

Tags: Banks, bills, contract, Credit, EBR, Export, Export Financing, Financing, goods, Letter of Credit, LIBOR, PCFC, Preshipment, quantity, rbi, ROle, Role of Banks, SEZ, shipment
By: Management Duniya