What is Pre-Shipment Finance or Packing Credit?
Pre-shipment Finance or Packing credit is a type of credit facility (loan), available for exporters. The advance is provided for financing the purchase of raw material, processing, manufacturing or packing of goods required before shipment of goods and for meeting working capital expenses for rendering of services.
Eligibility for Pre-shipment finance
Pre-shipment credit/ packing credit is extended on the basis of letter of credit opened in the favour of exporter or in favour of some other person by an overseas buyer (importer) or a confirmed and irrevocable order for the export of goods/ services from India or any other evidence of an order for export of goods/ services from India. The exporter must be holding Import Export Code (IEC). Read this to know What is Letter of Credit.
Period of Advance
The period of packing credit advance given by a bank depend on circumstances of the case, such as time required for procuring, manufacturing or processing and shipping the goods / rendering of services.
If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for confessional rate of interest ab initio and normal rate of interest will apply.
Disbursement of Packing Credit
Each packing credit sanctioned is maintained as separate account. Banks may release the packing credit in one lump sum or in stages as per the requirement for executing the orders / LC.
Banks keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports.
Liquidation of Packing Credit
The packing credit / pre-shipment credit should be liquidated out of proceeds of bills drawn for the exported commodities on its purchase, discount etc., i.e., converting pre-shipment credit into post-shipment credit.
It can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency A/c (EEFC A/c) as also from rupee resources of the exporter to the extent exports have actually taken place.
Running Account Packing Credit Facility
Pre-shipment credit to exporters is normally provided on lodgment of LCs or firm export orders, however, banks may extend Pre-shipment Credit ‘Running Account’ facility without prior lodgement of letters of credit / firm export orders, depending on the bank’s judgement regarding the need to extend such a facility.
Running account facility may be extended in following cases:
- Exporters whose track record has been good as also to Export Oriented Units (EOUs)/ Units in Free Trade Zones / Export Processing Zones (EPZs) and Special Economic Zones (SEZs)
- Letters of credit / firm orders should be produced within a reasonable period of time as decided by the banks.
- Individual export bills are marked against the outstanding pre-shipment credit on ‘First In First Out’ (FIFO) basis. However, export credit in respect of individual pre-shipment credit should not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier.
- Running account facility is not be granted to sub-suppliers.
Interest on Packing Credit
Interest on Pre-shipment finance is charged at a concessional rate which is lower than the commercial rate of interest.