Packing Credit is a pre-shipment credit extended to the exporters to facilitate him for meeting several financial requirements such as purchase of raw materials and its processing, packing, storing and shipping of goods. It is a short term credit available to all exporters. Hence, this is called pre-shipment credit which is essentially working capital finance made available to the exporters to arrange for goods as per the export. It is generally granted in the form of loans or cash credits. It may also be granted in the form of overdraft facilities. The exporter who wants to avail the pre-shipment credit facility should make a formal application to his bank along with the firm contract with the buyer or a copy of the export order or a copy of the letter of credit.
Major Types of Packing Credit
Pre-shipment finance is available in various forms. Important types of packing credit are explained very briefly.
1. Extended Packing Credit Loan
This type of packing credit is advanced by the bankers to their customers who are considered as first class customers for them. This facility is extended for a short period in order to enable the customers acquire or procure goods. Once goods are acquired in the custody of the exporter, the bank converts this clean advance into hypothecation or pledge loan.
- Packing Credit Loan (Hypothecation): This facility may be an extended one over what we had studied above after procuring the raw materially by the customer. Or this credit may be made available for obtaining raw materials, work-in-progress and finished goods. Such goods are made available as security for loan granted. The production of such raw materials and work-in-progress or work-in-process into finished goods can be undertaken even by sub-contractors.
- Packing Credit Loan (Pledge): This facility is available for material which are seasonal or obtained in odd bunched lots. The documents relating to acquisition of raw materials are pledged to the bank, while possession remains with the exporter. Such raw material is pledged with the bank to obtain advances.
2. Secured Shipping Loans
This loan is available to the customers when the finished goods are got ready for purposes of export. However, loan will be released only after the raw materials are converted into finished product, or as exportable product and the same are handed over to transport operators or clearing and forwarding agents for shipment. These loans are for every short duration and the loans will be sanctioned only on lorry receipt or rail receipt. The only condition which bank insists on is that the goods are handled by approved transport operators or clearing or forwarding agents.
3. Advances against Back-to-Back Letter of Credit
In this case, the exporter opens letter of credit in favor of supplier instead of blocking the funds for the purchase of raw materials or finished products from manufacturers. When the exporter who has received original letter of credit, requests his banker to open a letter of credit, in favor of his supplier, it is called opening back-to-back letter of credit is that it is based on original credit and calls for documents evidencing dispatch of goods mentioned in the original credit.
4. Red or Green Clause Letter of Credit
Red clause letter of credit authorizes the negotiating banker to make advances to a beneficiary to enable him to purchase goods and deliver them to the company for the purpose of export. Unless and until they are purchased and shipped, it is impossible for the shipper to obtain the Bill of Lading and Insurance Policy. In the event, shipper needs packing credit, he has to request the buyer to arrange for opening a red clause letter of credit which contains a special clause typed in red, authorizing the advancing bank to make either immediate payment to the beneficiary in full or in parts, as per the terms provided in the letter and against specified documents and conditions.
According to Green Clause, credit is provided for storage of goods at the port. Pre-shipment of finance, as well as storage, facility will be available to the exporter under this letter of credit. Both red and green clause credits used extensively in Australian Wool Trade. For such a letter of credit in India, prior permission of government is required.
5. Advances against Export Incentives
Advances against export incentives are usually granted at post shipment stage. However, under certain circumstances like, when the value of material to be produced exceeds as compared to FOB value of the contract, such advances are granted at pre-shipment stage. These advances are repaid by negotiation of export bills and cut of receipts of export incentives. Concessional rate of credit at the rate of 13 percent is available for 90 days to the exporters. These advances are covered by ECGC policies.
6. Advances Against Duty Drawback
The import duty paid on raw materials or components for export production or the excise duty paid on items indigenously produced for export are repaid to the exporter on completion of the export. The several items on which duty drawbacks are determined by the policies of the Government. The need for advance against duty drawback arises because of the delay involved in verifying the claims of the exporter on completion of the export. The items on which duty drawbacks are eligible will have the funds locked up till the government releases them after due verification the claim. During this interval, the exporter seeks financial assistance from the bank as the amounts due to him are locked up.
7. Packing Credit for Imports Against Entitlements under Advance Licence
The credit facility is available to manufacture of export goods. However, two conditions need to be fulfilled:
- The bank is satisfied that the imported material will be utilized for the items exported abroad.
- Letter of credit or firm order is produced within reasonable time which should not exceed 60 days from the date of advance.
8. Pre-shipment Credit in Foreign Currency (PCFC)
Under the PCFC scheme, exporters are allowed to avail pre-shipment credit in a convertible currency at interest rates not exceeding 0.75 per cent over 6 months LIBOR, i.e., on the basis on London Inter Bank Offered Rate. The credit will be self-liquidating in nature and will be adjusted by discounting the relative export bill designated in foreign currency. The credit under this scheme is available for a maximum period of 180 days. If extended beyond this period, 2 percent penal interest is charged. If the PCFC is not adjusted within 360 days, it will be adjusted at the TT selling rate for the currency concerned and will be treated as a rupee advance.