Institutional Finance for Export

Even if the exporter gets payment at the time of the shipment of goods, he has to arrange for finance to meet the expenses involved until the time of shipment. These include expenditure on the purchase of materials and components, processing packaging, packing, marking, transaction, warehousing etc. In many instances, the exporter is compelled to extend credit to the overseas buyer. In fact, in international marketing, the exporter is compelled rot to extend credit to the overseas buyer. In fact, in international marketing, the nature of the sale/credit terms offered is a very decisive factor in obtaining business. In many cases, the exporter has to wait for a period of time – short, medium or long – even after the shipment of goods to obtain payment from the overseas buyer. He has, therefore, to arrange for post-shipment finance, covering the period between to shipment of the goods and the receipt of payment. All the countries which are serious export promotion, have, therefore made institutional arrangements for the provision of both pre-shipment and post shipment finance. In India, the export sector is regarded as a priority sector.

Pre-Shipment Credit:

As the name indices, pre-shipment finance, also known as packing credit, refers to the credit extended prior to the shipment of goods. Pre-shipment credit enables him to meet his working capital requirements for the purchase of raw material and components, processing packing, transportation; warehousing etc. packing credit is short term finance. It is also advanced against export incentives.

In India, pre-shipment is provided by Indian and foreign commercial banks which are members of the Foreign Exchange Dealers’ Association. The packing credit advances by commercial banks in India are governed by the packing Credit Scheme of the Reserve bank. The salient features of this scheme are:

The loan is advanced only on receipt of an export order.

To obtain the loan, the exporter should deliver to the bank either a letter of credit established in his favor or a confirmed export order. However where the letter of credit or the confirmed export order is yet to be received, relevant evidence in the form of a cable, letter etc, is acceptable, provided that such cable, letter etc., contains information regarding at least the value of the order, the quantity and particular of goods, the date of shipment and name of the buyer.

All the packing credit advances must be repaid from the proceeds of the relative export bills negotiated or from the remittances received from abroad for the relative goods.

Packing credits are eligible for interest subsidy, normally for a period not exceeding 90 days, although the credits may be given for a period of 180 days for specified items such as engineering goods, with the permission of the Reserve Bank of India. In genuine cases of delay of shipment of specified items, a further period of 90 days may be allowed by the Reserve bank of India.

Packing credit is also available against incentives such advances should be paid by the exporter as soon as these are realized.

In terms of the Reserve Bank directive, banks are required to provide finance (which includes packing credit facilities) at a discounted rate of interest, which is specified by the Reserve Bank from time to time. No service charges are levied other than those stipulated by the Foreign Exchange Dealers’ Association of India. The premium payable to Export Credit Guarantees may however, be charged to the exporter.

Where a letter of credit or an export order is received in the name of an export house or any merchant exporter, an advance made even to a sub-supplier falls within the packing Credit Scheme. In such a case the sub-supplier submit to the bank a letter from the export house/merchant exporter, giving details of export house/merchant and of the supply allotted, and confirming that the export house/merchant exporter will not avail itself /himself of packing credit from any other source on the quantity so allotted. Since export bills are negotiated in the name of the export house/merchant exporter, the repayment of such packing credit should made by inland letters of credit opened by the export house/merchant exporter in favor of the sub supplier, or by proceeds of bills drawn by the sun supplier on the export house/merchant exporter. Whenever the bill on the export house/merchant exporter is not accompanied by a bill lading, a certificate should be obtained from the export for every quarter, stating that the goods have actually been exported.

An undertaking from the sub-supplier shall be obtained that any advance payment received towards the supply of goods would be adjusted to the packing credit.

Post shipment Finance:

As has already been mentioned, the international market is, by and large, very competitive, and the extension of credit facilities to the buyer is one of the important determinants of the expansion in the export business. Most exporters are not in a position to extend credit to overseas buyers. To promote the export business, therefore, the burden of credit should be shifted from the exporters by either the financial institutions providing credit, directly or indirectly, to the buyers, or by extending credit to the exporters to enable them to extent credit to their buyers. Accordingly, financial institutions provide buyer’s credit, line of credit, and supplier’s credit.

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