Pre-Shipment Finance

A pre requisite to avail of pre-shipment financing is that the Exporter

should have a credit facility in place with a bank. Each bank has a credit
process that determines the amount of funding the bank can give the
company.

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".

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.

How much financing can I as an exporter get?

This is ‘need based financing’, - which means that banks will lend an
amount to you after factoring in a particular margin (this margin is
calculated as a percentage of the value of the order). The margin differs
from bank to bank. Margins are stipulated for the 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 exporter's profit margin.

The banking practice is that the exporter can obtain 90% of the FOB
(freight on board) value of the order or 75% of the CIF (cost, insurance and
freight) value of the order.
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.

In what currency's 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 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.
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

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 don't
encourage liquidation by debit to cash credit account.

Another interesting thing is that, once the goods are shipped out and
documents tendered to the bank, the pre-shipment advance is converted to
post-shipment advance.

In the case of PCFC credit, pre-shipment finance is liquidated by

discounting bills under 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 the exporter avails of PCFC, he will not be
eligible for post-shipment credit in rupees; he will have to avail of post-
shipment funding in the same currency in which he availed of the pre-
shipment funding.