Unit 2

Pre Shipment Finance Scheme

Structure
2.1 Introduction
Objectives
2.2 Need for Export Finance
2.3 Export Financing Facilities
2.4 Pre Shipment Finance for Exports
Types of Pre Shipment Finance
Requirements for Getting Packing Credit
Eligibility for Pre Shipment Credit

2.5 Interest Rates for Pre Shipment Packing Credit under Indian
and Foreign Currency
2.6 Mechanism of Disbursal of Pre Shipment Finance
2.7 Special Cases of Pre Shipment Financing
2.8 Summary
2.9 Glossary
2.10 Terminal Questions
2.11 Answers
2.12 Case Study

Caselet
Pre shipment Credit in Foreign Currency (PCFC)
Pre shipment means any loan or advance granted or any other credit
provided by a bank to an exporter for financing the purchase, processing,
manufacturing or packing of goods prior to shipment, on the basis of Letter
of Credit opened in his favour or in favour of some other person, by an
overseas buyer or a confirmed and irrevocable order for the export of goods
from India or any other evidence of an order for export from India having
been placed on the exporter or some other person, unless lodgement of
export orders or letter of credit with the bank has been waived.
With a view to making credit available to exporters at internationally
competitive rates, authorized dealers have been permitted to extend Pre
shipment Credit in Foreign Currency (PCFC) to exporters for domestic and
imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR related
rates of interest as detailed below.

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Scheme
(i) The scheme is an additional window for providing pre shipment credit
to Indian exporters at internationally competitive rates of interest. It will
be applicable to only cash exports.
(ii) The exporter will have the following two options to avail of export finance:
(a) to avail of pre shipment credit in rupees and then the post shipment
credit either in rupees or discounting/rediscounting of export bills
under EBR Scheme.
(b) to avail of pre shipment credit in foreign currency and discount/
rediscounting of the export bills in foreign currency under EBR
Scheme.
(iii) Choice of currency
(a) The facility may be extended in one of the convertible currencies
namely, US Dollars, Pound Sterling, Japanese Yen, Euro, etc.
(b) To enable the exporters to have operational flexibility, it will be in
order for banks to extend PCFC in one convertible currency in
respect of an export order invoiced in another convertible currency.
For example, an exporter can avail of PCFC in US Dollar against
an export order invoiced in Euro. The risk and cost of cross currency
transaction will be that of the exporter.
(iv) Banks are permitted to extend PCFC for exports to ACU countries.
(v) The applicable benefit to the exporters will accrue only after the realization
of the export bills or when the resultant export bills are rediscounted on
without recourse basis.
Source: Adapted from http://rbidocs.rbi.org.in/rdocs/notification/PDFs/
24738.pdf (Retrieved on 11 March 2013)

2.1 Introduction
In the previous unit, you studied the framework of export and import finance in
India. Exports play an important role in accelerating the economic growth of
developing countries like India. In view of the important role played by exporters,
several initiatives have been taken by the Reserve Bank of India and Government
of India to provide their support. These initiatives have contributed to the
impressive increase in Indian exports. Of the several factors influencing export

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growth, credit is a very important factor which enables exporters in efficiently

executing their export orders. The commercial banks provide short-term export
finance mainly by way of pre and post shipment credit. Export finance is granted
in Indian as well as foreign currency.
Finance for export business involves funding a new export venture through
which the firm has been planning to extend its business basically from a domestic
business model to the one that is internationally oriented and export based.
In this unit, you will study about the need for export finance, export financing
facilities, pre shipment finance for exports, mechanism of disbursal of pre
shipment finance and special cases of pre shipment finance.

Objectives
After studying this unit, you should be able to:
identify the need for export finance
discuss the export financing facilities
analyse the pre shipment finance for exports
recognize the mechanism of disbursal of pre shipment finance
state the special cases of pre shipment finance

2.2 Need for Export Finance

In view of the importance of export credit in maintaining the pace of export growth,
RBI has initiated several measures in recent years to ensure timely and hasslefree flow of credit to the export sector. These measures, inter alia, include
rationalization and liberalization of export credit interest rates, flexibility in
repayment/prepayment of pre shipment credit, special financial package for large
value exporters, export finance for agricultural exports, gold card scheme for
exporters, etc. Further, banks have been granted freedom by RBI to source
funds from abroad without any limit exclusively for the purpose of granting export
credit in foreign currency. This has further enabled banks to increase their lending
under export credit in foreign currency substantially during the last few years.
RBI introduced the export financing scheme in 1967 for the first time
specifically for meeting the exporters requirements. Previously exporters used
to avail commercial loans from various banks to fund their export operations.
This was a costly affair as there were no public sector banks by then, and private
banks and money lenders used to charge an exorbitant rate of interest from
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exporters. Since 1968, RBI ensured some schemes to make short-term export
finance available to exporters at internationally competitive interest rates while
at the same time ensuring that the rates are well above the financing banks
cost of finance for short-term loans of the same duration in the relevant currency.
The nationalization of banks in 1969 provided further leverage to RBI and the
Government of India to devise schemes for exporters for export credit in a liberal
way in order to enable them to remain competitive in relation to their competitors
from other countries. Under the export financing scheme, banks extend working
capital loans to exporters at pre and post shipment stages. The credit limits
sanctioned to exporters are based upon the financing banks perception of the
exporters creditworthiness, requirement of the business assessed by way of
trade cycle and past performance.
Export financing may be denominated either in Indian Rupees or in foreign
currency. For both types of pre shipment financing, RBI sets a ceiling on the
interest rate that banks may charge from borrowers under the scheme. Since
RBI fixes only the ceiling rate of interest for export credit; hence banks are free
to fix lower rates of interest for exporters on the basis of their actual cost of
funds, operating expenses and taking into account the track record and the risk
perception of the borrower/exporter.
The Government of India understands that there is much stake involved in
export-import business as trade is the lifeline of any economy. Many countries
worldwide give much importance to export-import operations as international
trade provides nations the opportunities of reaping benefits of competitive and
comparative advantage in their trade operations. Many countries, including China,
have used international trade as an engine of economic growth of the nation. In
the era of economic globalization, both merchandise and services exports are
an important tool of employment generation.
One of the integral aspects of the international trade financing is that there
is significantly higher degree of risks in international trade operations. An
awareness and understanding of export risk on the part of exporter coupled with
the appropriate risk strategy can help him develop, design and implement his
financing options better and can also determine his success or failure in the
export business. Although export-related risks are similar to domestic risks but
they differ in scope. One has to be smart enough to assess, analyse and appraise
successfully many additional factors of international commerce and accordingly
has to employ the techniques that can be used to manage these risks. It is
critical for Indian exporters dealing in international trade transactions to identify
and seek ways to mitigate the major risks involved in export-import business. A
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missed or delayed payment from an international buyer whom an exporter has

trusted a lot can irreparably damage the future of his business. The solution for
such challenges lies in a well considered approach of export financing at various
stages and by using all available mechanisms to ensure that the risk of the
proposed transaction can be well and effectively managed; if need arises. Due
to all these reasons a well planned, synchronised and systematic export financing
strategy is over-emphasized for success in intentional trade.

Self Assessment Questions

1. RBI introduced the export financing scheme in ______ for the first time
specifically for meeting the exporters requirements.
2. The Government of India understands that there is much stake involved
in Export-Import business as trade is the lifeline of any economy.
(True/False)

2.3 Export Financing Facilities

Having realized that Indian exporters have to be supported by appropriate
financing options so as to provide them a level playing field in international
markets; the Government of India has decided that export finance shall be
available at both stagespre and post shipment stages of international trade
transactions. There may be different financing requirements of exporters at pre
and post shipment finance stage such as packing credit to sub supplier, running
account facility, packing credit in foreign currency, packing credit for deemed
exports, packing credits for consulting services and advance against cheques/
drafts received as advance payments. One of the crucial aspects that emerge
is that export financing facilities should be designed so as to resolve the finance
needs both at pre shipment and post shipment stages.
The scheme of export financing was first introduced by the RBI in 1967.
The scheme is intended to make short-term working capital finance available to
exporters at internationally comparable interest rates. Under the earlier scheme
in force up to 30 June 2010, RBI fixed only the ceiling rate of interest for export
credit while banks were free to decide the rates of interest within the ceiling
rates keeping in view the BPLR (Benchmark Prime Lending Rate) and spread
guidelines and taking into account the track record of the borrowers and the
risk perception. In order to enhance transparency in banks pricing of their loan

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products, banks were advised to fix their BPLR after taking into account the
following factors:
(a) Actual cost of funds
(b) Operating expenses
(c) A minimum margin to cover regulatory requirement of provisioning/capital
charge and profit margin.
Bank BPLR was introduced in 2003 but fell short of its original objective of
bringing transparency to lending rates. This was mainly because banks could
lend below BPLR under the BPLR system. Due to all these reasons, there exists
unhealthy competition among banks, difficulty in assessing the transmission of
RBI policy rates, assessing the actual costs of fund of exporters, etc. Keeping
these factors in mind, RBI appointed a committee under the chairmanship of
RBI Deputy Governor Anand Sinha, to look into the issue of transparency in
export credit pricing and functioning of BPLR system. The Anand Sinha
Committee recommended the introduction of Base Rate system, after studying
the efficacy of base rate with respect to transmission of monetary policy.

Self Assessment Questions

3. Bank Prime Lending Rate System (BPLR) was introduced in ________ but
fell short of its original objective of bringing transparency to lending rates.
4. One of the crucial aspects that emerge is that export financing facilities
should be designed so as to resolve the finance needs both at pre shipment
and post shipment stages. (True/False)

2.4 Pre Shipment Finance for Exports

Pre shipment credit, also known as packing credit, means any loan or advance
granted or any other credit provided by a bank to an exporter for financing the
purchase, processing, manufacturing or packing of goods prior to shipment or
working capital expenses for rendering of services on the basis of Letter of
Credit opened in his favour or in favour of some other person, by an overseas
buyer or a confirmed and irrevocable order for the export of goods/services
from India or any other evidence of an order for export from India having been
placed on the exporter or some other person, unless lodgement of export orders
or letter of credit with the bank has been waived off. The main purposes of pre
shipment finance are as follows:
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(a) Firm has a longer delivery cycle for its product or services.
(b) Firm has to procure raw materials from other suppliers to be processed
for exports.
(c) Firm has to pay the expenditure in order to carry out other manufacturing
activities like payment of salary, labour wages, electricity bills, etc.
(d) Firm has to process and pack the goods for export consignment.
(e) Firm has to pay the freight and carriage expenses for shipping the goods
to the buyers.
(f) Sometimes buyers are unable to make the payment or even part payment
in advance, necessitating the firm to raise funds to procure the raw material
for manufacturing the goods.
(g) Firms use pre shipment finance as an instrument to tide over the
challenges of exchange rate risks and exchange controls.
Pre shipment finance in India is extended in both ways as packing credit
to eligible exporters in Indian Rupee (PCIR) as well as in Foreign Currency
(PCFC).

2.4.1 Types of Pre Shipment Finance

Following are the types of pre shipment finance offered by banks and financial
institutions in India:
(a) Packing credit
(b) Advance against cheques/draft etc. representing advance payments

2.4.2 Requirements for Getting Packing Credit

As per RBI guidelines, pre shipment export finance facility in India is provided to
an exporter who satisfies the following criteria:
(a) Exporter should have the ten digit importer exporter code number (IEC)
allotted to him by the Director General of Foreign Trade (DGFT) or an
equivalent regional authority.
(b) Exporter should not be in the caution list of RBI.
(c) In case the goods to be exported are not under OGL (Open General
Licence), the exporter should have the required Special Export License
issued for this purpose by DGFT. In case of canalised items, he should
have the permit (No Objection Certificate) to export goods through a
canalising agency.
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In addition to the above, banks in India have also been advised to provide the
packing credit to an exporter on the satisfactory production of the following
evidences to the bank:
(a) Bank is satisfied with the formal application of the exporter for releasing the
packing credit on the basis of undertaking to the effect by the exporter that
he would ship the goods to an overseas importer within stipulated due date
as communicated by the exporter. In return, exporter ensures to submit the
relevant shipping documents to the banks within the prescribed time limit.
(b) If the exporter has the firm order under international business contract
format or irrevocable Letter of Credit. Banks sometimes also provide
packing credit to the exporter of good track record on the production of
original cable/fax/telex messages that are being exchanged between the
exporter and the buyer.
(c) Sometimes the exporter gets Special Export Licence (SEL) issued by
DGFT as this product falls under the restricted or canalized category.
Once the bank becomes satisfied about the export prospects of goods
then they can provide pre shipment finance to the exporter.
It should be noted that the confirmed order as received by the exporter
from the overseas buyer should reveal complete information regarding the full
name and address of the overseas buyer, description, quantity and value of
goods (FOB or CIF), destination port and the last date of payment.

2.4.3 Eligibility for Pre Shipment Credit

Pre shipment credit for financing the export transactions in international trade
operations is usually issued to that exporter who has got the export order or
irrevocable letter of credit in his own name issued by the importer or by the bank
of importer. In exceptional cases, when the exporter is merchant exporter and
he himself does not manufacture the goods but procures them from a third
party; bank may consider granting credit to a third party manufacturer or supplier
of goods who does not have export orders in their own name. The rationale of
granting such pre shipment export credit to the third party is based on the fact
that some of the responsibilities of meeting the export order requirements have
been outsourced to him by the main exporter. If the export order is in the name
of two parties as supplier and sub supplier or as main supplier and allied supplier;
banks in India have been authorized to provide export credit on the basis of
shared percentage of export order between two or more than two exporters.

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Self Assessment Questions

5. Pre shipment finance in India is extended in both ways as ________ to
eligible exporters in Indian rupee (PCIR) as well as in foreign currency.
6. Pre shipment credit for financing the export transactions in international
trade operations is usually issued to that exporter who has got the export
order. (True/False)
Activity 1
Suppose you are an exporter and you want to avail pre shipment finance.
What are some of the ways in which pre shipment finance is offered by
banks and financial institutions in India?

2.5 Interest Rates for Pre Shipment Packing Credit under

Indian and Foreign Currency
Packing credit i.e. pre shipment finance to Indian exporter is available in both
Indian rupee and foreign currency. Prior to 1 July 2010, bank prime lending system
was in place whereby it was recommended by RBI that banks should charge
interest on pre shipment credit up to 270 days at the rate of BPLR minus 2.5
percentage basis. Under this system the period of credit is to be reckoned from
the date of advance. This system has been revamped in order to make it
compatible with geo-economic realities and Base Rate system has been
introduced by RBI with effect from 1 July 2010. BPLR system has been abolished
and was applicable only up to 30 June 2010.
RBI circular on export credit makes it clear that if pre shipment export
credit is not liquidated from the proceeds of bills on purchase, discount, etc. on
submission of export documents within 360 days from the date of advance,
such export credit given to the exporter ceases to qualify for the concessional
rates of interest as indicated in Table 2.1.
In circumstances where packing credit is not extended beyond the original
period of sanction and exports take place after the expiry of sanctioned period
but within a period of 360 days from the date of advance, the exporter would be
eligible for concessional credit only up to the sanctioned period. For the balance
period, exporter will have to pay interest rate prescribed under the category
Export Credit Not Elsewhere Specified (ECNOS). Banks are advised to explain

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with reasons to the exporter why such credit has been extended up to 360 days
from the sanctioned period of credit.
In cases where exports do not take place within 360 days from the date of
pre shipment advance, such credits will be termed as Export Credit Not
Elsewhere Specified (ECNOS) and banks are free to charge interest rate as
prescribed under this category. If exports do not take place at all, banks should
charge on relative packing credit domestic lending rate plus penal rate of interest,
if any, to be decided by the banks on the basis of a transparent policy approved
by their Board. The applicable rate of concessional/preferential interest for lending
on export credit has been given in Table 2.1.
Table 2.1 Applicable Rate of Concessional/Preferential Interest for Lending on Export Credit
PRE SHIPMENT CREDIT IN INDIAN RUPEE FROM THE DATE OF ADVANCE
Base Rate or over and above Base Rate
1.
Up to 270 days
2.

1.

2.

Against incentives receivable

Base Rate or above Base Rate
from the government covered by
ECGC
Guarantee up to 90 days
PRE SHIPMENT CREDIT IN FOREIGN CURRENCY
Up to 180 days
Not exceeding 350 basis points from 15
November, 2011 to 4 May 2012 (200
basis points up to 14 November 2011)
over LIBOR/EUROLIBOR/EURIBOR
Beyond 180 days and up to 360
Rate for initial period of 180 days
prevailing at the time of extension plus
days
200 basis points i.e. (i)(a) above plus
200 basis points

Source: RBI Master Circular for Export Credit

Due to increased pressure on Indias foreign exchange reserves, banks have

been given the liberty to charge the interest rates as per their economic interests.
No ceiling rates on pre shipment in export credit in foreign currency are applicable
for any bank. However, applicable interest should be fixed with reference to ruling
LIBOR, EURO LIBOR or EURIBOR.
Recently, the Union Minister for Commerce, Industry and Textiles
announced a 2% Interest Subvention Scheme on rupee export credit as an
additional incentive to boost exports. These incentives came in the backdrop of
the Annual Supplement of the Foreign Trade Policy announced on June 5, 2012.

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Take a look at the screenshot given below of the circular issued by RBI regarding
the interest subvention available to certain sectors such as: handicrafts, carpet,
handlooms, Small and Medium Enterprises (SMEs), readymade garments,
processed agriculture products, sports goods, toys and engineering goods.
Interest subvention is a subsidy of interest given by the Government to certain
sectors, some of which are named above. An example of this is: Suppose a
textile company borrows from a bank at 10% and Government has allowed a
subvention of 2% to the textile industry. So, the bank will take net interest from
textiles companies at just 8%, whereas the other sectors have to pay 10% to
the bank.

Self Assessment Questions

7. Due to increased pressure on Indias foreign exchange reserves, banks
have been given the liberty to charge the interest rates as per their
economic interests. (True/False)
8. BPLR system has been _____________.

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Activity 2
Suppose you are an exporter and have availed pre shipment finance from a
bank of India. However, if the deal does not happen how can the bank obtain
that amount?

2.6 Mechanism of Disbursal of Pre Shipment Finance

Ordinarily, each packing credit sanctioned should be maintained as separate
account for the purpose of monitoring the period of sanction and end-use of
funds. Pre shipment finance to exporters goes through following stages from
sanction to its liquidation.
(i) Appraisal and Sanction of Limits: Banks check various aspects while
making an appraisal and sanction of export credit to exporters. Some of
the important aspects that banks check are product profile of the exporter
in international market, political and economic environment of the country
of import etc. Banks also look into the creditworthiness and solvency report
of the prospective buyer, with whom the exporter proposes to do business.
In order to arrive at a fruitful conclusion about the creditworthiness and
solvency position of buyers; banks consult various credit rating agencies
like Export Credit Guarantee Corporation (ECGC) or private consulting
agencies like Small and Medium Enterprises Rating Agency (SMERA),
Vistas, Dun and Brad Street, etc. The sanction of pre shipment export
credit is based on the satisfactory appraisal of the following:
(a) The exporter has a good track record or is a regular customer of the
bank. He is a bonafide exporter and has a good standing in the market
in respect of his creditworthiness.
(b) The exporter has all the necessary licenses/permits and volume
permit as mandated in Schedule II of the ITC (HS) classification of
Foreign Trade Policy for Export.
(c) The country to which the exports are to be made is not under UN
watch list or does not fall under the Restricted Cover Countries (RCC)
or is not facing any kind of international sanctions for transfer of funds
like Iran, Ivory Coast, Somalia, Iraq, Syria ,etc.
(ii) Disbursement of Packing Credit Advance: On completion of successful
appraisal of various aspects for disbursal of export credit; banks check
whether the exporter has executed the list of documents as stipulated by

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it for this purpose. Disbursement of export credit is normally allowed only

after the successful submission of all documents by the exporter.
Sometimes, an exporter may not have got the confirmed order but is
expecting to get one during festivals like Christmas, Holi, Id-Ul-Fitr, etc.
and needs finance to keep his goods ready by the time the order comes
in. Under such circumstances, RBI has allowed banks in India to provide
a special packing credit facility. This special facility is known as Running
Account Packing Credit. Banks use special checks for the following
particulars while processing the running account facility to the exporter:
(a) Name of the buyer
(b) Commodity to be exported
(c) Quantity
(d) Period of credit
(e) International demand of the product
(f) Value (either CIF or FOB)
(g) Last date of shipment/collection/negotiation
(h) Any other terms to be complied with
The quantum of pre shipment export finance is fixed depending on the
FOB value of the export order or value of irrevocable Letter of Credit or the
domestic values of goods, whichever is found to be lower. Bank may
consider the inclusion of marine insurance and freight charges at
subsequent stages when confirm order has come and the goods are ready
to be shipped.
Banks are also particular about the disbursals of export packing credit;
particularly in cases when the disbursal is to be made in stages. Banks
disburse the amount of credit possibly through cheque, draft, etc. and not
in cash, directly to the supplier of raw material of the exporter. The bank
usually decides the duration of packing credit based on the export cycle
or manufacturing cycle of the product. As per RBI guidelines, the maximum
period of the packing credit period in India is 180 days. However, the banks
are authorized to use their discretion in providing a further 90 days extension
in packing to the exporter on their satisfaction.
(iii) Follow up of Packing Credit Advance: Banks usually hypothecate the
stock of the exporter and exporter is required to submit stock statement
providing all the necessary details about the stocks. Banks use such stocks

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as a guarantee for securing the pre shipment export credit in advance.

Banks may demand such information from the exporter at the time as
they deem fit keeping in mind the exporter s reputation and
creditworthiness. In addition, banks also physically inspect the stocks at
regular intervals at the premises of the exporter.
(iv) Liquidation of Packing Credit Advance: Pre shipment export credit has
to be liquidated out into post shipment credit after the submission of export
bills by the exporter or alternatively on realization of export proceeds of
the relevant shipment. The liquidation of pre shipment export credit can
also be done by the payment receivable as export benefits/incentives/
subsidies from the Government of India. In India, some of the export
benefits/incentives/subsidies received from the Government of India include
the duty drawback, duty credit scrip, payment under Vishesh Krishi and
Gram Udyog Yojana, duty entitlements under Special Focus Initiatives,
payment from the Market Development Assistance (MDA) of the Central
Government or from any other relevant source.
If the exporter has failed to provide the goods for export or export could not
take place due to cancellation of order or any other reason; then banks
are authorized to recover/realize the entire advance from the exporter
along with a certain interest rate. In some cases, RBI Master Circular
allows some flexibility in the use of packing credit whereby the exporter is
allowed and permitted to substitute the exportable commodity. Thus, pre
shipment export finance can be repaid by export proceeds of another
commodity which can be exporter to the same or another buyer. This is to
be done with prior approval and satisfaction of banks and banks usually
discourage such substitution but allow it in cases where market
circumstances have compelled the exporter to do so or the exporter has a
good track record or is a long standing client of the bank with good reputation.
(v) Overdue Packing Credit: In some cases, banks may have to consider
pre shipment export finance as overdue if the exporter fails to liquidate the
packing credits as per stipulated rules and regulations of RBI. Banks are
allowed to grant overdue finance in bonafide cases but if the condition
persists and the exporter fails to liquidate the packing credit even after
such overdue period; then the banks can take the necessary actions to
recover such dues as per the normal recovery procedure.

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Self Assessment Questions

9. Banks use to check the various aspects while making an appraisal and
sanction of export credit to exporters. (True/False)
10. The quantum of pre shipment export finance is fixed depending on the
_______ of the export order.

2.7 Special Cases of Pre Shipment Financing

Let us take a look at some of the unique cases of pre shipment financing.
(i) Packing Credit to Sub Supplier: Pre shipment export finance can be
shared between the actual export order holder and the manufacturer of
export goods on the basis of disclaimer. Such a disclaimer should be
signed by the actual export order holder by clearly indicating that he himself
is not utilizing any credit facility against the export order which has been
transferred to a manufacturer for manufacturing the goods for the export
order. Such a disclaimer should also be signed by the bankers of actual
export order holder. In such circumstances an inland letter of credit can
be opened in favour of manufacturer of the goods, thus the sub-supplier
become eligible for packing credit.
(ii) Running Account Facility: Running Account Facility is provided by the
bank to those exporters who deal in multiple items of exports and help
them keep ready their various goods for the purpose of exports. Usually
the bank sanctions such kind of export credit only to those exporters who
have a good track record and an impeccable reputation in the eyes of the
bank. Such an exporter is also required to produce the Letter of Credit/
export order as and when he gets it from his international clients.
(iii) Pre shipment Credit in Foreign Currency (PCFC): Banks in India are
also allowed to extend pre shipment credit in foreign currency as such
facility enables Indian exporters to have a check on currency fluctuation
risk and negotiate internationally competitive price for the products. The
rate of interest on pre shipment credit in foreign currency is based on the
London Interbank Offered Rate (LIBOR). Exporter has the freedom to get
pre shipment credit in foreign currency in any freely convertible currency
such as USD, Pound Sterling, Euro, Canadian Dollar, Australian Dollar, etc.
(iv) Packing Credit Facilities to Deemed Exports: Deemed exports are
the exports which do not leave the territorial boundary of India. Such export
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supplies are usually made to multi-lateral aid agencies and programme

like United Nations, Asian Development Bank and others. The unique aspect
of such exports is that the supplies are made on the basis of international
competitive bidding process and payments are received in freely convertible
foreign currency as stipulated by FEMA, 2000. Such deemed exporters
are eligible for concessional interest rate both at pre and post shipment
stages of an export transaction.
(v) Packing Credit facilities for Consulting Services: Consulting services
fall under services export and such export does not involve physical
movement of goods through India custom borders. Services exports are
vital and play an important role in realizing the precious foreign exchange
from abroad. The RBI follows a liberal policy for financing the services
exports and offers packing credit facilities to Indian services exporter.
(vi) Advance against Cheque/Drafts Received as Advance Payment: Pre
shipment credit is also available in places where the exporter receives
direct payments from abroad by means of cheque/drafts etc. Banks in
India provide pre shipment credit at a concessional rate to those exporters
who possess a good track record. Such a credit facility shall be available
only till the time of realization of export proceeds of cheque/draft from
abroad. Banks usually offer such services at the discretion and as per the
track record of the exporter.

Self Assessment Questions

11. Pre shipment export finance can be shared between the actual export
order holder and the manufacturer of export goods on the basis of
disclaimer. (True/False)
12. _______are the exports which do not leave the territorial boundary of India.

2.8 Summary
Let us recapitulate the important concepts discussed in this unit:
In view of the importance of export credit in maintaining the pace of export
growth, RBI has initiated several measures in the recent years to ensure
timely and hassle free flow of credit to the export sector.
The scheme of export financing was first introduced by the RBI in 1967.

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Pre shipment finance in India is extended in both the ways as packing

credit to eligible exporters in Indian Rupee as well as in foreign currency.
Packing credit i. e. pre shipment finance to Indian exporter is available in
both Indian Rupee and foreign currency.
Ordinarily, each packing credit sanctioned should be maintained as
separate account for the purpose of monitoring the period of sanction and
end-use of funds.
There are special cases of pre shipment financing in India.

2.9 Glossary
Running Account Facility: Running Account Facility is provided by the
bank to those exporters who deal in multiple items of exports and help
them keep ready their various goods for the purpose of exports.
Pre shipment credit: It means any loan or advance granted or any other
credit provided by a bank to an exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment.
Letter of Credit: A letter from a bank guaranteeing that a buyers payment
to a seller will be received on time and for the correct amount.

2.10 Terminal Questions

1. What is the need for export finance in India?
2. Write a short note on export financing facilities in India.
3. What do you understand by pre shipment credit?
4. Explain the interest rates for pre shipment packing credit under Indian and
foreign currency.
5. Describe the stages for the disbursal of pre shipment finance in India.
6. Give examples of special cases of pre shipment packing.

2.11 Answers
Self Assessment Questions
1. 1967
2. True

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3. 2003
4. True
5. Packing credit
6. True
7. True
8. Abolished
9. True
10. FOB value
11. True
12. Deemed exports

Terminal Questions
1. In view of the importance of export credit in maintaining the pace of export
growth, RBI has initiated several measures in the recent years to ensure
timely and hassle free flow of credit to the export sector. For more details,
refer section 2.2.
2. The Government of India has decided that export finance shall be available
at both stagespre and post shipment stages of international trade
transactions. For more details, refer section 2.3.
3. Pre shipment credit, also known as Packing Credit, means any loan or
advance granted or any other credit provided by a bank to an exporter for
financing the purchase, etc. For more details, refer section 2.4.
4. Packing credit i.e. pre shipment finance to Indian exporter is available in
both Indian Rupee and Foreign Currency. For more details, refer section
2.5.
5. Some of the stages for the disbursal of pre shipment finance are: (i)
Appraisal and Sanction of Limits (ii) Disbursement of Packing Credit
Advance (iii) Follow up of Packing Credit Advance (iv) Liquidation of Packing
Credit Advance (v) Overdue Packing. For more details, refer section 2.6.
6. Special cases of pre shipment packing are given in detail in section 2.7.

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2.12 Case Study

Export Finance
Export finance has become an important tool of export promotion in countries
like India. Even developed countries like the US, Germany and Japan are
building comprehensive systems and institutions for providing finance to
their exporters. The development of a suitable financing mechanism that
provides not only adequate and timely credit but also at cheaper rate is the
sine qua non for export promotion. It is all the more necessary for a country
like India where foreign trade constitutes a high percentage of its GNP.
Foreign trade financing assumes added importance as our foreign trade
accounts for high percentage of almost 15 percent of our GNP. The high
volume of transactions in our export/import requires finance through the
banks without which it is not possible to maintain and increase it for
development of our economy.
Export finance is required by all-weather manufacturer-exporters or
merchant exporters (including export/trading houses) irrespective of their
scale of operation i.e. small, medium or large. It may be more for small or
medium scale exporters and a little less for their large brethren. The former
(small or medium) exporters also known as second line borrowers face
more difficulties in arranging finance and obtaining the credit, particularly
when there is no L/C covering the export transaction. The difficulties in
obtaining finance for exports of new products to new or traditional markets
or for new non-traditional export lines are comparatively more as the risk
involved is more. The reason is not merely adequate security, but
assessment of risk arising from non-availability of data/information on
overseas markets and customers. This is more so in developing countries
where banks and other financial institutions do not have an efficient
infrastructure for collection of necessary information.
Hardly any export takes place on advance payment basis. The exporter
has, therefore, to arrange his own finance for production as well as supply
on credit to overseas buyers. Even his suppliers (whether finished products
to merchant exporters or of inputs to manufacturer-exporters) hardly allow
any credit on their supplies. Rather, they mostly work on advance payment
system as there is a huge domestic market pull in countries like India. Hence,
there is always a need for export finance.

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Discussion Questions
1. Explain the growth trend of export finance in India.
2. What do you think are the benefits of export finance?
Source: Compiled by Author
References
D.C. Kapoor (2005). Export Management, Vikas Publishing House, New
Delhi.
Doise, D. (2007). Uniform Customs and Practice for Documentary Credits
(UCP 600).
Joshi, R.M. (2009). International Business, Oxford University Press.
Khurana, P.K. (2007). Export Management, Galgotia Publications.
Ram, P. (2010). Export Documentation & Procedure Manual (A-Z),
Anupam Publications.
Apte, P.G. (2006). International Financial Management, 4th Edition, Tata
McGraw-Hill Publications, New Delhi.
Beedu, R.R. (2012). Documentary Letter of Credit with Text of UCP 600 e
UCP 600 Practice and Procedures.
Warner, S. (2008). The Letter of Credit. R. Carter & Brothers.
P. Veera Reddy and P. Mamatha (2005). Exports Made Easy, Commercial
Publications.
E-References
rbidocs.rbi.org.in

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