Export Financing is the term used to describe the broad variety of financing based on the export market. The goal of export financing is to enable companies to enter a foreign market.

After the shipment has passed domestic customs, there could be a substantial amount of time when the goods are in transit and are then received by the importer. In particular, when it comes to developing markets, the opportunity to apply favorable payment terms to the importer is also a big part of securing an order. The objective of export finance is to maintain a positive cash flow cycle during the gap.

Pre-shipment finance is credit granted to the exporters by a financial institution. Pre-shipment credit is a part of working capital finance. Pre-shipment finance includes any finance that an exporter needs before they send goods to a buyer.

The main objectives behind pre-shipment finance are:

Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods and raw material.

Process and pack the goods.

Ship the goods to the buyers.

Meet other financial costs of the business.

Types of Pre-shipment Finance

Following special schemes are available lo in respect of pre-shipment finance

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.

1.1. 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.

1.2. 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 Loan - Secured shipping loan may be obtained once the goods are delivered to the transport operator or to the shipping clearing and forwarding agent. It shall be issued against receipt of the lorry or railway receipt. It is prolonged for a very short period of time, taking into account the time taken to transport goods to port and the completion of the shipping and customs formalities.

3. Advances against Red Clause Letter of Credit - If the exporter wishes to obtain packing credit then the importer should request that the letter of credit be opened by the red clause. Red clause letter of credit authorizes local banks to grant advances to exporters for the processing of export orders to meet their working capital requirement. The issuing Bank guarantees these advances.

4. Advance against Check or Draft - If exporters have earned direct payments from abroad through checks or drafts, then the bank may grant expo credit at a concessional rate to exporters with good track records until the time of check or draft proceeds are realized. The banks, however, have to be assured that the proceeds are under an export order.

5. 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.

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.

Different Stages of Pre-Shipment Finance

1. Appraisal and sanction of limits - Pre-shipment finance or packing credit is essentially a working capital advance made available for the specific purpose for procuring/processing/manufacturing of goods meant for export. Both expenses will be able to be funded under the packaging credit before shipment. Packing advance credit should only be liquidated from export proceeds. While considering credit facilities for export activities, banks examine the aspects of product profile, country profile and commodity profile in particular. The bank also look into the status report of the prospective buyer, with whom the exporter proposes to do business.

2. Disbursement of Packing Credit Advance - Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provide a special packing credit facility and is known as Running Account Packing.

3. Follow up of Packing Credit Advance - Exporters must submit inventory statement containing all the relevant stock details. The banks then use it as a guarantee to secure the packing credit ahead of time. The Bank also decides on the presentation rate for these stocks. In addition, registered dealers (banks) often inspect the stock at regular intervals, physically.

4. Liquidation of Packing Credit Advance

Packing Credit Advance needs to be liquidated from as the preceding shipment's export proceeds, thus turning reshipment credit into post shipment credit. This liquidation can also be accomplished through the payment receivable from the Government and includes duty drawback, payment from the Central Government's Market Development Fund (MDF), or from any other relevant source.

5. Overdue Packing - Bank considers a packing credit to be late, unless the creditor liquidates the packing credit on the due date. And if the situation continues then the bank must take the required action to recover its dues according to the usual recovery protocol.

Special Cases

1. Packing Credit to Sub Supplier

Packing credit can only be shared between the Export Order Holder (EOH) and the producer of the products on the basis of disclaimer. This disclaimer is normally issued by the EOH to indicate that it does not use any credit facility against the portion of the order being transferred on the manufacturer's behalf.

2. Running Account facility

It is a special facility under which a bank has the right to grant the exporter of any origin a pre shipment advance for export. Sometimes banks also scale out these facilities depending on the exporter's good track record. In return the exporter will deliver the letter of credit / company export order within a given timeframe.

3. Pre-shipment Credit in Foreign Currency (PCFC)

Authorized dealers are permitted to extend Pre-shipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders.

4. Packing Credit Facilities to Deemed Exports - Deemed exports made to multilateral funds aided projects and programs, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest facility both at pre and post supply stages.

5. Advance against Checks/Drafts received as advance payment - Where exporters receive direct payments from abroad by means of checks/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the checks or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don't wait for the importer to deposit the funds.

Basic Features of Post Shipment Finance

The features of post shipment finance are:

Purpose of Finance

Post shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.

Basis of Finance

Post shipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.

Types of Finance

Post shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self-liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature.

Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.

1. Quantum of Finance

As a quantum of finance, post shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre shipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.

2. Period of Finance

Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

Financing For Various Types of Export Buyer's Credit

Post shipment finance can be provided for three types of export:

Physical exports: Finance is provided to the actual exporter.

Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies.

Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.

Supplier's Credit

Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders all or part of the interests incurred.

Types of Post Shipment Finance

The post shipment finance can be classified as:

1. Export Bills purchased/discounted.

2. Export Bills negotiated

3. Advance against export bills sent on collection basis.

4. Advance against export on consignment basis

5. Advance against undrawn balance on exports

6. Advance against claims of Duty Drawback

1. Export Bills Purchased/ Discounted. (Documents against Payment & Documents against Acceptance Bills)

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks:

The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit.

The bank also faces the documentary risk where the issuing bank refuses to honor its commitment. So, it is important for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.

3. Advance against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the bank's branch for collection and not from the date of advance.

4. Advance against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports.

5. Advance against Undrawn Balance

Bank advances against the undrawn balance to facilitate the exporter. The undrawn balance cannot be more than 5% of the total invoice value. The exporter has to give undertaking to realize and surrender the balance amount too within the prescribed period of 180 days from the date of shipment of goods.

6. Advance against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.

Questions:

1.What is the difference between pre-shipment and post-shipment finance?

2.Which among the pre-shipment finance you think is the hardest to handle? Explain your answer.

3.What are the main objectives of pre-shipment finance?

4.Considering the current condition of our economy, do you still think that expert financing is feasible?

5.What are the classifications of post-shipment finance?