What is Pre shipment credit, Types of pre-shipment credit
What is Pre shipment credit – Businesses that are engaged in exporting domestically produced goods to abroad often find it difficult to get the finances required unless there are confirmed and irrevocable orders from the overseas buyers. Pre-shipment credit is one of such means that enable the exporter enjoy the financial assistance before actual disposal of consignment.
Pre shipment credit:
As the name suggests ‘Pre-shipment credit’ means any loan or advance granted or any other credit provided by a bank or financial institution to an exporter for financing various activities ranging from sourcing to distribution prior to shipment. Generally, to meet the below mentioned requirements:
- Sourcing raw material
- Run the manufacturing processes
- Safe and secure storage of raw materials, work in progress and finished good
- Packaging and labeling
- Shipment costs etc.,
A pre-shipment is provided to the exporter based on certain documents which act as a final evidence to the order placed by the buyer. These are:
- Letter of credit arranged in his favor or in favor of some other person, by an overseas buyer
- A confirmed and irrevocable order for the export of goods
Types of pre-shipment credit:
There are 2 types of pre-shipment credits available. They are
1. Packing credit:
This is provided to the exporter who satisfies the following criteria:
- The exporter should have a ten digit importer exporter code number allotted by Directorate General of Foreign Trade (DGFT)
- Exporter should not be in the caution list of RBI
- If the goods to be exported are not under Open General License (OGL), the exporter should have the required license /quota permit to export the goods.
- Those who satisfy the above criteria will be able to get the packing credit once the below mentioned documents are provided to the bank:
- Formal application for release the packing credit with undertaking to the effect that the exporter would ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time Frame.
- Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.
- License issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
2. Advance against Cheque / Draft:
This an advance granted against the cheques/drafts that are sent by the importer to the exporter as a means of settlement of the order. The bank may grant export credit at concessional rate to the exporters of goods based on his track record, till the time of realization of the proceeds of the cheques or draft etc.
Pre shipment finance is sanctioned in the following forms:
- Packing Credit in Indian Rupee
- Packing Credit in Foreign Currency
Banks may disburse the pre-shipment loan either in lump sum or in stages based on the requirements of exporter. In case of stage wise disbursement, banks will monitor the progress in order execution before the final disbursement is sanctioned to the exporter. And the amount of credit decided based on the nature and size of the order besides the financial capacity of the exporter to honor the borrowed amount. However, banks have their maximum limits of the pre-shipment credit that can be granted in foreign currency.
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