Pre-Shipment Export Finance: Issues and Running Account Packaging Credit

Pre Shipment Export Finance : Intricacies / Some issues and Running Account Packaging Credit

Pre-Shipment Export Finance (PSEF) plays a crucial role in assisting exporters from the receipt of export orders until the shipment of goods. Article explains some intricacies and issues surrounding Pre-Shipment Export Finance (PSEF), particularly focusing on Pre-Shipment Export Credit (PSEC) and Running Account Packaging Credit.

Pre Shipment Export 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. Such finance is extended for the purpose of procuring raw material, processing, packing, transporting, warehousing of goods meant for exports.

Pre Shipment Export Financing can be in the form of : Export Packing Credit (EPC) in rupees, Packing Credit in foreign currency (PCFC), Advance against government incentives covered under ECGC policy, Advance against receivables – Duty Drawback Scheme, Advance against cheques/ drafts received in advance of exports.

(Ref. RBI Master Circular DBOD No.Dir.(Exp).BC19/04.02.002/2014-15 dated July 1,2014)

Sharing of EPC under PCFC

i. The rupee export packing credit is allowed to be shared between an export order holder and the manufacturer of the goods to be exported. Similarly, banks may extend PCFC also to the manufacturer on the basis of the disclaimer from the export order holder through his bank.

ii. PCFC granted to the manufacturer can be repaid by transfer of foreign currency from the export order holder by availing of PCFC or by discounting of bills. Banks should ensure that no double financing is involved in the transaction and the total period of packing credit is limited to the actual cycle of production of the exported goods.

iii. The facility may be extended where the banker or the leader of consortium of banks is the same for both the export order holder and the manufacturer or, the banks concerned agree to such an arrangement where the bankers are different for export order holder and manufacturer. The sharing of export benefits will be left to the mutual agreement between the export order holder and the manufacturer.

Pre – Shipment Credit in Foreign Currency (PCFC):

PCFC facility is granted to exporters in foreign currency for domestic and imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR related rates. This is an additional window for providing pre shipment credit to Indian Exporters at Internationally competitive rates and applicable to only cash exports. The exporters will have following options to avail of export finance:

• Pre Shipment credit in rupees and then the Post Shipment credit either in rupees or discontinuing/ re discontinuing of export bills in foreign currency under (EBR) Abroad Scheme (dealt separately)
• Pre Shipment credit in foreign currency and discounted / re discounting of the export bills in foreign currency in the (EBR) Scheme.
• Pre Shipment credit in rupees and then converted drawls into PCFC at the discretion of the bank.

The facility may be extended in one of the convertible currencies viz. US Dollars, Pond Sterling, Japanese Yen, Euro, Operational flexibility is provided by extending PCFC in one convertible currency in respect of an export order invoiced in another convertible currency. The risk and cost of cross currency transaction will be that of the exporters. Banks are permitted to extend PCFC for exports to ACU countries. The applicable benefits to the exporters will accrue only after the realization of the export bills or when the resultant export bills are discounted on “Without Recourse” basis.

Source of Funds for Banks: Banks are permitted to utilize the foreign currency balance available with the bank in Exchange Earner Foreign Currency Account(EEFC), Resident Foreign Currency Account [RFC (D)] and foreign currency (Non Resident) Account Scheme, and the foreign currency balances available under Escroe account and Exporters Foreign Currency Account for financing the pre shipment credit in foreign currency. In addition, banks may arrange for borrowings (Line of Credit) from abroad without RBI approval provided the rate of interest on the borrowing does not exceed 100 basis points over six months LIBOR/ EURO LIBOR/ etc. Banks may also avail lines of credit from other banks in India in case they are not in a position to raise loans from abroad subject to the condition that the ultimate cost to the exporter should not exceed 200 bps above LIBOR/EURO/EURIBOR etc.

Spread: In respect of export credit to the exporters at internationally competitive rates under the schemes of ‘Pre shipment credit in foreign currency’ (PCFC) and “Rediscounting of Export bills abroad” (EBR), banks are free to determine the interest rates on export credit in foreign currency with effect from May 5, 2012. Banks shall collect interest of PCFC at monthly interval against sale of foreign currency or out of balances in EEFC accounts or out of discounted value of the export bills if PCFC is liquidated.

Period of Credit: The PCFC would be determined on case to case basis and will be available for maximum period of 360 days. For extension of PCFC within 180 days, banks, banks are free to determine the interest rates on export credit in foreign currency with effect from May 5^th, 2012. Further extension will be subject to the terms and conditions fixed by the bank concerned and if no export take place with in 360 days, the PCFC will be adjusted at T.T. selling rate for the currency concerned.

Disbursement of PCFC: In case full amount of PCFC or part thereof is utilized to finance domestic input banks may apply appropriate spot rate for the transaction. Based on the operational convenience, banks may stipulate the minimum lots taking into account the availability of resources, etc.

Liquidation of PCFC Account

i. General

PCFC can be liquidated out of proceeds of export documents on their submission for discounting/rediscounting under the EBR Scheme detailed in para 6.1 or by grant of foreign currency loans (DP Bills). Subject to mutual agreement between the exporter and the banker, it can also be repaid / prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent exports have actually taken place. 

ii. Packing credit in excess of F.O.B. value

In certain cases, (viz. agro based products like HPS groundnut, defatted & deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where packing credit required is in excess of FOB value, PCFC would be available only for exportable portion of the produce. 

iii. Substitution of order/commodity

Repayment/liquidation of PCFC could be with export documents relating to any other order covering the same or any other commodity exported by the exporter or amount of balance in the EEFC Account. While allowing substitution of contract in this way, banks should ensure that it is commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why PCFC extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any. 

Cancellation/non-execution of export order

i. In case of cancellation of the export order for which the PCFC was availed of by the exporter from the bank, or if the exporter is unable to execute the export order for any reason, it will be in order for the exporter to repay the loan together with accrued interest thereon, by purchasing foreign exchange (principal + interest) from domestic market through the bank. In such cases, interest will be payable on the rupee equivalent of principal amount at the rate applicable to ECNOS at pre-shipment stage plus a penal rate of interest from the date of advance after adjustment of interest of PCFC already recovered.

It will also be in order for the banks to remit the amount to the overseas bank, provided the PCFC was made available to exporter from the line of credit obtained from that bank.

iii. Banks may extend PCFC to such exporters subsequently, after ensuring that the earlier cancellation of PCFC was due to genuine reasons. 

Running Account Facility for all commodities 

i. Banks are permitted to extend the ‘Running Account’ facility under the PCFC Scheme to exporters for all commodities, on the lines of the facility available under rupee credit, subject to the following conditions:

a. The facility may be extended provided the need for ‘Running Account’ facility has been established by the exporters to the satisfaction of the bank.

b. The PCFC will be marked off on the First in First Out (FIFO) basis. it can also be marked off with proceeds of export documents against which no PCFC has been drawn by the exporter.

c. Bank should closely monitor the production of the firm order or LC subsequently by exporters and also the end use of funds. It has to be ensured that no diversion of funds is made for domestic use. In case of non utilization of PCFC drawls for export purposes, the penal provisions stated above should be made applicable and the ‘Running Account facility should be withdrawn for the concerned exporter.

d. Banks are required to take any prepayment by the exporter under PCFC Scheme with in their foreign exchange position and Aggregate Gap Limit (AGL) that occur as indicated below. With the extension of ‘Running Account’ Facility mismatch are likely to occur for a long period involving cost to the banks. Banks may charge the exporters the funding cost, if any, involved in absorbing mismatches in respect of pre payment beyond one month period.

e. Banks may extend the facility only to those exporters whose track record has been good.

f. In all cases, where pre-shipment credit ‘Running Account’ facility has been extended, the LCs or firm orders should be produced within a reasonable period of time.

g. PCFC can also be marked-off with proceeds of export documents against which no PCFC has been drawn by the exporter.

h. Banks may arrange for borrowings from abroad. Banks may negotiate lines of credit with overseas banks for the purpose of grant of PCFC to exporters without the prior approval of the RBI, or may avail lines of credit from other banks in India if they are not in a position to raise loans from abroad on their own, provided the bank does not have a branch abroad. The spread between the borrowing and lending bank is left to the discretion of the banks concerned.

ii. Banks should closely monitor the production of firm order or LC subsequently by exporters and also the end-use of funds. It has to be ensured that no diversion of funds is made for domestic use. In case of non-utilisation of PCFC drawals for export purposes, the penal provisions stated above should be made applicable and the ‘Running Account’ facility should be withdrawn for the concerned exporter.

Conclusion: Pre-Shipment Export Finance, particularly through Pre-Shipment Export Credit and Running Account Packaging Credit, plays a vital role in facilitating export activities. By addressing intricacies and issues in PSEF, exporters can effectively manage their financial requirements and enhance their competitiveness in international markets.