Pre Shipment Financing

What is Pre–Shipment Finance?

The Reserve Bank of India compiles on a daily basis and publishes reference rates for Spot USD/INR, EUR/INR, Pre-shipment finance includes any credit that an exporter needs before they send goods to a buyer. Once the business has a confirmed order from a buyer, which is sometimes backed by a Letter of Credit, working capital finance is often required to fund wages, production costs and buying raw materials. Exporters can access receivables backed financing, inventory/ warehouse financing and pre-payment financing.

Features of Packing Credit in Rupees (PC)

1. Interest subvention of 3 per cent on the pre-shipment credit for seven employment-oriented export sectors

• Textiles including handlooms
• Handicrafts
• Carpets
• Leather
• Gems & Jewellery
• Marine products
• Small & Medium exporters.

1. The packing credit availed against an LC/ order will be adjusted by the bank from the export proceeds made against that L/C order
2. A packing credit is normally given for a period of not exceeding 180 days
3. Running Account Facility: This Facility granted to exporters with good track record to avail PC without lodging an L/C order.
4. PC is granted at a concessional rate of interest. The prime lending rate is not applicable to export finance
5. Refinance can be available by banks from the reserve bank against the packing credit granted to the exporter.
6. PC is available for both cash exports and deemed exports

Features of Packing Credit in Foreign Currency (PCFC)

1. PCFC is available only for cash exports in foreign currency
2. The interest rate is less in PCFC, compared to that of packing credit in rupees; exporters may not prefer PCFC when they expect a fall in the value of rupees.
3. PCFC can be maintained as running accounts
4. PCFC is self-liquidating in nature and is liquidated by purchasing/discounting of bills
5. Refinance from the Reserve Bank is not available to banks against PCFC
6. Available to exporting companies as well as commercial banks for lending to the former. We present you three different scenarios, where you can find the interest rate arbitrage between PCFC & RPC (Rupee packing credit)

Note: As per current Interest Rate scenario and post Interest rate subvention coming back to play, in many cases PCINR is becoming more feasible source of working capital funding. With Interest rate cuts by almost all banks to formidable levels (Base Rate) and with a 3 % subvention, the Interest cost for PCINR/EPC/RPC has become very lucrative. However PCFC can also be availed and the cost can be further reduced to negative if we do the Rolling Forward Strategy for PCFC.What is Pre–Shipment Finance?