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What is Packing Credit facility?


Packing Credit facility for exports is also known as pre-shipment credit facility. It is the  short-term working capital finance to exporters in the form of Loan or a ‘Running Account’ (Cash Credit Account). Packing Credit facility is for procuring, processing (where necessary), manufacturing and finally for packing of goods. Packing Credit facility is also available for the working capital requirement towards rendering of services, to an overseas buyer. In the other words, loan or an advance is available from a bank to exporter, from procuring raw materials till the packing of finished goods ready for export. Hence, the facility is called as ‘Packing Credit’ or ‘Pre-Shipment Credit. Bank lends Packing Credit loan or Cash Credit to the exporter generally on the basis of confirmed Letter of Credit. Banks also extend packing credit against a firm Order for export of goods or services from India to exporters of good track record. However in some special cases, lodgment of export orders or letter of credit has been waived by the banks, based on past experience and credit worthiness of the exporters The period for which Packing Credit advance to be given to the exporter will be decided by the bank, based on nature of exports and relevant factors, such as time required for procuring, processing, manufacturing and packing or for rendering the services as per export order.

Packing credit can be availed in Rupee or foreign currency. If packing credit is availed in foreign currency, interest rate is linked to LIBOR. Packing Credit -Foreign Currency (PCFC) cannot remain outstanding beyond 180 days. If export does not take place even after 360 days PCFC should be converted at TT selling rate.

The general requirement for export finance is that the exporter should be

  1. The customer of the bank where he wants to avail facilities.
  2. He must hold Import Export Code No.(I.E. Code No.) issued by Direct General of Foreign Trade (DGFT).
  3. Holds Registration cum membership certificate from eExport Promotion Council
  4. Should not be in the caution list of RBI.
  5. He is not in the specific approval list of ECGC.
  6. Exporters of services also qualify for working capital export finance (pre and post shipment) for consumables, wages, supplies etc.) The exporter shall register with the Electronic and software Export Promotion Council or Services Export Promotion Council or with Federation of Indian Export Organizations, as applicable to their unit

Before lending to exporters, the bank should ensure that the customer is not in the Specific Approval list of ECGC. Banks have to notify ECGC, in a prescribed format within 30 days for the facilities granted. For new accounts and accounts taken over from other banks, prior approval of ECGC is necessary. 

Packing Credit in the form of ‘Running Account’ Facility:

In some cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit / firm export orders from the overseas buyers. This is in view of, the availability of raw materials, ordinarily seasonal or the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorised by RBI to extend Pre-shipment Credit Running Account’ facility in respect of any commodity, without insisting on prior lodgment of letters of credit / firm export orders. However, it is obligatory on the part of exporter to produce letters of credit / firm orders within a reasonable period of time to be decided by the banks for such facility. Running account facility is subject to the following conditions. Running account facility is available only to those exporters whose track record has been goodThe facility is also to Export Oriented Units (EOUs) or Units in Free Trade Zones or Export Processing Zones (EPZs) and Special Economic Zones (SEZs).

In case of ‘Running Account’ individual export bills will be marked by the bank. When the bank receives the export bill for negotiation or collection, the export proceeds will be marked against the earliest outstanding in the account on ‘First In First Out’ (FIFO) basis. Banks would monitor that export credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance. Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter.  Sub-suppliers are not eligible for Running account facility. 

Packing Credit facility for Exporters of Services:

Exporters of services qualify for working capital export credit (pre and post shipment) for consumables, wages, supplies etc. The exporter shall register with the Electronic and software Export Promotion Council or Services Export Promotion Council or with Federation of Indian Export Organizations, as applicable to their unit. There shall be a time lag between the outlays of working capital expense and actual receipt of payment from the service consumer or his principal abroad. There shall be valid Working Capital gap i.e. service is provided first while the payment is received some time after an invoice is raised. Service exporter Company will raise the invoice as per the contract, and they would utilize the funds of export proceeds to repay the export credit availed of from the bank.

How to Liquidate Packing Credit outstanding?

Each packing credit granted by the bank is normally considered as separate account for the purpose of monitoring the period of loan released. Packing Credit can be released either in stages or in one lump sum, as per executing requirement of the orders or L.C terms. The packing credit loan or running account is liquidated out of proceeds of export bills purchase, discount etc. In the process, the pre-shipment liability of the borrower is converted into post-shipment credit. In some occasions, subject to mutual agreement between the exporter and the banker, it can also be repaid/ prepaid out of balances in EEFC A/c .The exporter can  also liquidate packing credit advance from his rupee resources to the extent exports have actually taken place.

Banks have, operational flexibility to extend the following relaxations to their exporter clients who have a good track record:

a) Repayment/liquidation of packing credit with substitution of proceeds of another export documents may also be possible. This could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. Substitution of contract in this way, is allowed only on bank is satisfied that it is commercially necessary and unavoidable. Banks should also satisfy themselves about the valid reasons as to why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. The substitution of contract is allowed when the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any.

b) The existing packing credit may also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. However, it is possible that the exporter might avail of EPC with one bank and submit the documents to another bank. In view of this possibility, banks may extend such facility after ensuring that the exporter has not availed of packing credit from another bank against the documents submitted. If any packing credit has been availed of from another bank, the bank to which the documents are submitted has to ensure that the proceeds are used to liquidate the packing credit obtained from the first bank.

c) These relaxations is not permitted for transactions of sister concern or associate group concerns.

Refinance: Refinance is available for the Pre-Shipment advances granted to exporters by the banks from Reserve Bank of India. The refinance is available  for amaximum period of 180 days.  If pre-shipment advances are not adjusted by the customer by submission of export documents within 360 days from the date of advance, the advance will ab-initio cease to qualify for concessional rate of interest prescribed for export credit, and in such an event, banks are free to decide the rate of interest from the date of advance. If exports do not materialize at all, banks would charge on relative packing credit at domestic lending rate plus penal rate of interest, if any, to be decided by the banks on the basis of policy approved by their Board.

Report of default: The bank has to report the default from any exporter within 30 days of recall of advance or within 4 months from the date of due date or extended due date whichever is earlier. No further payment of premium is necessary.

Claim should be submitted to ECGC within 6 months of reporting default. 

(2) Comments

  1. dhruv

    If we have to give CC/PCFC/ EPC to a manufacturing firm, which has gross block investment in plant and machinery of 12 crores, will it come under PSL ? Also pls tell what is the limit , if any, of plant and machinery investment(gross block) that an exporter client should have, if he has to fit in PSL classification/guidelines

    1. Surendra NaikSurendra Naik - Post author

      Effective from April 1, 2015, the export credit extended up to a sanctioned limit of ₹25 crore per borrower/ unit having turnover of up to ₹100 crore is classified as Priority sector advance. However, it cannot be classified as MSME unit because the bank loan up to Rs.5 crore per borrower or unit to micro small and medium enterprises (as defined under MSMED Act 2006) are only treated as priority sector advance ( lending to Medium enterprises is not eligible to be included for the purpose of computation of priority sector lending).

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