Pre & Post Shipment Export Credit Finance

Financing your exports can be a complex process, but navigating it doesn't have to be a headache. This blog, guided by the expertise of CA Vikas Jain, will be your one-stop resource for understanding pre-shipment and post-shipment export credit finance.

Through a series of frequently asked questions (FAQs), we'll break down the nitty-gritty of both options. You'll learn:

• What is pre-shipment and post-shipment export credit finance?
• What are the benefits of each option?
• How can you avail these facilities?
• What are the eligibility criteria?
• What are the key things to consider when choosing between pre-shipment and post-shipment credit?

This blog is designed to be informative and engaging. We'll use clear explanations, real-world examples, and address common concerns to ensure you have a comprehensive understanding of both financing options.

So, buckle up and get ready to unlock the potential of export finance! Stay tuned for our upcoming posts where we'll delve deeper into each type of credit with the help of FAQs meticulously crafted by CA Vikas Jain.

Ques 1: What is Pre-Shipment Export Finance (PSEC)?

Ans: Pre-Shipment Export Finance (PSEC) is a type of financial assistance that is available to exporters. This assistance starts when they receive an export order and continues until the goods are shipped.

In simple terms, this financial assistance helps exporters to produce goods by providing them with funds from the bank.

Ques 2: What are the benefits of Pre-Shipment Export Finance?

Ans: PSEC plays a very important role in the export business. It has many benefits, such as:

• Exporters can purchase raw materials, get goods produced, and cover packaging and transportation costs, even before receiving payment.
• With the arrangement of funds through this facility, exporters can compete better in the international market by reducing their cash flow concerns.
• By using this facility, exporters can take large orders and grow their business.

Ques 3: How many types of Pre-Shipment Export Credit (PSEC) facilities are there?

Ans: PSEC can be of two types:

• Pre-Shipment Export Credit (PSEC): This credit facility is available in rupees and foreign currency. It is used to meet domestic expenses related to production and shipment.
• Running Account Packing Credit (RAPC): This is a type of revolving credit that is available in foreign currency and rupees. It is beneficial for those exporters who need finance repeatedly for multiple export orders.

Ques 4: Where can an exporter get this facility from? Can new exporters also get it?

Ans: This facility can be obtained from government and private banks. Yes, new exporters can also get it.

Ques 5: What documents does a bank need to submit to avail this facility?

Ans: To avail this facility, the bank has to submit many documents, such as:

• Export Order
• Purchase Order
• Invoice
• Packing List
• Shipping Bill (Shipping Bill)
• Bill of Lading
• Insurance Cover Note

Ques 6: What interest rate does the bank charge on this facility?

Ans:

Under this facility, if the exporter takes a loan in rupees, he will have to pay the REPO rate plus bank margin to the bank. Nowadays, the interest rate for this facility is around 9 percent.

The biggest advantage of using this facility in rupees is that the government gives an interest subsidy (interest subsidy) of 2 percent to 3 percent on interest under the interest equalization scheme (interest equalization scheme) for using this facility in rupees. As a result, the effective interest comes down.

If the exporter avails this facility in foreign currency, he will have to pay SOFR Rate Plus Bank margin. SOFR rate is the international market interest rate.

If an exporter avails this facility in foreign currency, he does not get the benefit of interest waiver scheme.

In the current situation, it is beneficial to avail Pre-Shipment Export Credit in rupees.

Ques 7: What is the repayment period for the Pre-Shipment Export Finance facility?

Ans: Usually, the repayment period is 180 days, but in some special cases it can be extended up to 365 days. It depends on the bank and the loan amount.

Ques 8: Can Pre-Shipment Credit be used for export of services (export of services)?

Ans: Yes, this facility can be used for export of services. But there are some conditions:

• The exporter must be registered with an export promotion council.
• The exporter must have a Valid Export Service Contract.
• Payment should be received in Foreign Currency.
• The purpose of availing this facility should be to fulfill the Working Capital Gap.

Ques 9: Can Pre-Shipment Credit be used for the export of capital goods (capital goods)?

Ans: This facility can be used for the export of capital goods, under this facility many types of expenses can be covered such as

• Purchase of Raw Material
• Manufacturing Process expenditure
• Packaging & Labeling expense
• Inspection and Testing Charges
• Inland transportation cost

Ques 10: Are there any restrictions (restrictions) on using this facility?

Ans:

Under this facility, some restrictions are imposed by the bank. Like:

• The funds should be used for the purpose for which the loan was given.
• The repayment period of the loan is also determined by the bank, the exporter will have to repay the loan within that period.

Ques 11: Can this facility be used for domestic sales (domestic sale)?

Ans: This facility can only be used for export related expenses.

Ques 12: What is the role of RBI in Pre-Shipment Credit (Packing Credit)?

Ans: The RBI sets the Regulatory Framework for Pre-Shipment Credit in India. This framework provides direction to banks on how to grant such loans and what things to keep in mind.

Ques 13: Can this facility also be used in foreign currency? And what are its benefits?

Ans: Yes, Pre-Shipment Export Finance can be obtained in foreign currency. This option is generally beneficial for exporters who:

• Receive their export proceeds in foreign currency.
• Need to make payments in foreign currency to import goods. This saves them currency conversion charges.
• By availing this facility in foreign currency, there is natural currency hedging. If there is a negative impact in foreign currency, the exporter avoids that loss.

Ques 14: What can the Pre-Shipment Export Credit facility be used for?

Ans: The Pre-Shipment Export Credit facility can be used to meet various production and shipment related expenses, such as:

• Purchase of raw materials
• Processing and manufacturing costs
• Packaging and labeling
• Domestic transportation

Ques 15: What are the eligibility criteria for availing Pre-Shipment Export Credit?

Ans: To avail this facility, the exporter needs to meet certain conditions, such as:

• Having an Import-Export Code (IEC).
• Having a confirmed export order.
• The exporter should have collateral security to avail this facility.

Ques 16: What is the difference between Pre-Shipment Credit and Post-Shipment Credit?

Ans:

• Pre-shipment export credit can be used from receiving an export order until the goods are shipped. Whereas post-shipment export credit is used after the goods are shipped.
• Pre-shipment export credit can be used for 90 days to 180 days. Whereas post-shipment export credit can be provided after goods shipment, its tenor depends on credit terms with the buyer.
• Pre-shipment export credit is used for raw material purchase, labor payment, packaging, and internal transportation. Whereas post-shipment credit is used to repay Pre-shipment credit, and some additional payments can also be received in post-shipment.
• Post-shipment export credit facility can be availed as export bill discounting facility and export bill factoring facility.

Ques 17: Can PSEC be shared between a merchant exporter and a manufacturer?

Ans: Yes, Pre-shipment export credit can be shared between the Export Order Holder and the goods manufacturer. This helps the manufacturer get a loan at a cheaper rate.

Ques 18: What is the Interest Equalization Scheme (IES) for pre and post-shipment rupee export credit for exporters? What is the benefit of this scheme for exporters?

Ans: The Interest Equalization Scheme (IES) provides a subsidy on interest rates for pre and post-shipment rupee export credit offered by the government. This scheme offers an interest subsidy of 2 percent to 3 percent per annum.

Here are some of the objectives of this scheme:

• To make Indian exporters more competitive in the Global Market.
• To reduce the finance cost of exporters. This allows them to offer competitive prices to their customers, thereby increasing export value.
• Under this scheme, all MSME manufacturers exporting any product category are eligible for a 3 percent interest subsidy.
• The government provides a 2 percent interest subsidy for specific sectors, which cover around 410 tariff lines.
• Exporters availing benefits of Telecom Instruments and Production Linked Incentive (PLI) Scheme are not eligible for this scheme.
• The government has extended this scheme till June 30, 2024.
• In this scheme, the bank itself claims the interest subsidy from the government.

Ques 19: How can an exporter avail the benefits of the Export Interest Equalization Scheme (Interest Equalization Scheme)? What is the process?

Ans:

To avail the benefits of this scheme, the exporter needs to meet certain conditions, such as:

• The exporter must have a valid Import and Export Code (IEC).
• They should be exporting specific goods or services that are eligible under this scheme.
• The exporter should have a Minimum Export Turnover.

Now, let's understand the procedure for availing benefits under this scheme:

• Exporters need to register themselves on the DGFT website and generate a unique identification number (UIN). This UIN is valid for one year and needs to be renewed annually.
• The bank needs to apply for Pre or Post-Shipment Credit.
• The bank will check the exporter's documents and approve the export limit based on their guidelines.
• Upon receiving the export order, the bank will verify it and sanction the Pre-Shipment Export Credit facility. This includes checking if the product/service falls under the eligible category of the IES scheme.
• After the goods are shipped, the exporter needs to submit the shipping documents to the bank.
• The bank will then process the export documents and disburse the loan amount to the exporter's account after deducting processing fees and margins.
• Once the foreign exchange is received from the importer, the exporter will repay the Pre-Shipment credit to the bank.
• The bank itself claims the interest subsidy benefit from the government based on the eligible interest rate and duration of the loan

Ques 20: What are some important things to keep in mind while availing Pre-Shipment Export Credit?

Ans: Here are some important things to keep in mind:

• Carefully choose the type of Pre-Shipment Credit: As discussed earlier, there are two main types - Pre-Shipment Export Credit (Rupee Term Loan) and Running Account Packing Credit (Rupee/Foreign Currency). Choose the option that best suits your requirements.
• Understand the interest rate and repayment terms: Interest rates and repayment period can vary depending on the bank, loan amount, and currency chosen. Be sure to understand these terms thoroughly before finalizing the loan.
• Maintain proper documentation: Keep all the necessary documents related to the export order, purchase, production, packaging, and shipment organized for smooth processing by the bank.
• Negotiate terms: Don't hesitate to negotiate terms with your bank, especially the interest rate and processing fees.
• Maintain a good rapport with your bank: Building a good relationship with your bank can be helpful in securing loans and other financial services in the future.