Pre-Shipment Finance

A pre requisite to avail of pre-shipment financing is that the Exporter should

have a credit facility in place with a bank. Each bank has a credit process that
determines the amount of funding the bank can give the company.

1. Who is eligible for pre-shipment credit?

An exporter who holds an export order or Letter of Credit (LC) in his own
name to perform an export contract can avail of pre-shipment credit.

Banks may also grant pre-shipment advances without insisting on prior

lodgment of LCs or purchase orders. This is known as the "Running
Account Facility".

2. What is the purpose of this finance?

Pre-shipment finance can be availed of only for the specific purpose of

procuring raw materials / purchasing / manufacturing / processing /
transporting / warehousing / packing and shipping the goods meant for
export.

3. How much financing can I as an exporter get?

This is ‘need based financing’, - which means that banks will lend an amount to
you after factoring in a particular margin (this margin is calculated as a
percentage of the value of the order). The margin differs from bank to bank.
Margins are stipulated for the following reasons :

• to ensure that the exporter has some stake in the transaction

• to cover any erosion in the value of goods, and
• to ensure that there is no lending against the exporter's profit margin.

The banking practice is that the exporter can obtain 90% of the FOB value of the
order or 75% of the CIF value of the order.

1. What is the tenor of this funding?

The RBI has allowed banks to grant this funding at a concession for a
maximum period of 180 days. This period can be extended by the bank
without referring to RBI for a further period of 90 days. Banks grant this
extension in cases where the exporter faces genuine hardships in
completing his order.

If an extension is required beyond 270 days (i.e. 180+90 days), the RBI
has the discretion to grant another (maximum) extension of 90 days.

1
 However, if the exports do not take place at the end of this period, the
bank will charge interest from day one, at a rate left to the bank’s
discretion.

2. In what currency's can the exporter obtain pre-shipment credit?

Most often the pre-shipment borrowal is in the domestic currency, in the

case of an exporter based in India, the Indian Rupee. However in some
cases, the exporter may want to borrow in foreign currency because his
product has a large import component or he finds the cost of borrowing in
foreign currency lower than borrowing in the local currency. Borrowing in
foreign currency is feasible when the cost of Rupee borrowing (less the
currency premium) is greater than the cost of borrowing in the foreign
currency. This is discussed in greater detail in " when does foreign
currency risk arise?"

This will be easier to understand with the help of an example. Let us

assume that an exporters’ exports and imports are both payable in US
Dollars. Let us also assume that the import component is significant at,
say, 70%. In this case, the exporter is open to the effects of currency
movements both at the time of import, and then at the time of export.
Borrowing in USD can hence partially hedge his currency risk on the
export side, since his exports are also going to be in the same currency.

The above facility, allowed to exporters to avail of pre-shipment credit in

foreign currency, is termed as ‘Pre-Shipment Credit in Foreign
Currency’ or PCFC.

3. What is the cost of pre-shipment finance ?

Pre-shipment credit :

Upto 180 days - 10%

Between 180 –270 days - 13%

Over 270 days - Commercial rates which are likely to be higher than the
rate applicable upto 270 days.

USD Lending (PCFC) - Maximum of Libor + 1.5 pct

4. What are the ways in which I can liquidate the pre-shipment

finance ?

2
The pre-shipment facility can be liquidated by proceeds of export bills negotiated,
purchased or discounted. As far as possible, banks don't encourage liquidation
by debit to cash credit account.

Another interesting thing is that, once the goods are shipped out and documents
tendered to the bank, the pre-shipment advance is converted to post-shipment
advance.

In the case of PCFC credit, pre-shipment finance is liquidated by discounting bills

under the ‘Rediscounting of Export Bills Abroad’ scheme. PCFC can be
liquidated by discounting of export bills, or by grant of foreign currency loans by a
bank. Once the exporter avails of PCFC, he will not be eligible for post-shipment
credit in rupees; he will have to avail of post-shipment funding in the same
currency in which he availed of the pre-shipment funding.

Preshipment Credit in Foreign Currency (PCFC)

4. Authorised dealers are permitted to extend Preshipment 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.

The rate of interest on PCFC is linked to London Interbank Offered Rate

(LIBOR). According to guidelines, the final cost of exporter must not exceed
0.75% over 6 month LIBOR, excluding the tax.

The exporter has freedom to avail PCFC in convertible currencies like USD,
Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross
currency truncation is that of the exporter.

The sources of funds for the banks for extending PCFC facility include the
Foreign Currency balances available with the Bank in Exchange, Earner Foreign
Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and
Foreign Currency(NonResident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under
Escrow account and Exporters Foreign Currency accounts. It ensures that the
requirement of funds by the account holders for permissible transactions is met.
But the limit prescribed for maintaining maximum balance in the account is not
exceeded. In addition, Banks may arrange for borrowings from abroad. Banks
may negotiate terms of credit with overseas bank for the purpose of grant of
PCFC to exporters, without the prior approval of RBI, provided the rate of interest
on borrowing does not exceed 0.75% over 6 month LIBOR.

3
Pre-Shipment/Post-Shipment Credit in Foreign Currency to Exporters

Bank of Baroda provides PCFC in foreign currency to the exporters enabling them to
fund their procurement, manufacturing/ processing and packing requirements. These
loans are available at very competitive international interest rates covering the cost of
both domestic as well as import content of the exports. The PCFC can be availed in US$,
Euro, GBP and Japanese Yen.

The corporations/ exporters with a good track record can avail of a running account
facility with the Bank for PCFC. To qualify for this purpose, the exporters overdue bill
should not exceed 5% of the average annual export realisation during the preceding -3-
years.

Key Benefits

• In case of cancellation of export order, the PCFC can be closed by selling

equivalent amount of foreign exchange at TT selling rate prevalent on the date of
liquidation.

• The forward covers can be booked in respect of future PCFC drawings.

• The PCFC drawings are also permitted in cross currency subject to exporter
bearing the risk in currency fluctuations.

Terms & Conditions

• The corporations/exporters having firm export orders or confirmed L/C are

eligible for PCFC, provided they satisfy other credit norms of the Bank.

• PCFC in foreign currency is available for a maximum period of 180 days from the
date of first disbursement, similar to the case of Rupee facility.

• PCFC is to be repaid with the proceeds of the export bill submitted after
shipment.

• The PCFC in foreign currency are granted through the Integrated Treasury Branch
at Mumbai.

• Multi-currency drawings against the same orders are not permitted due to
operational inconvenience.

• Cross-country drawings are restricted to US dollars.

• In case, the export order is in a non-designated currency like Swiss Franc etc.
PCFC will be given only in US$. For orders in Euro, Pound Sterling and JPY,
PCFC can be availed in the respective currencies or US$ at the choice of exporter.

4
Pre-Shipment Credit in Foreign Currency (PCFC) / Rupee (PCR)
To enable small scale industries to raise finance at internationally
Purpose competitive rates as per Reserve Bank of India guidelines to fulfil
their export commitments.
Industrial concerns in the small scale sector and Government
recognised Export / Trading Houses sourcing their requirement for
export from SME sector with
Eligibile
a. profit making units with proven track record in exports for last
Borrowers
three years and sound financial position

b. requirement of export finance assistance of at least Rs.100

lakh
Pre-shipment Credit in Foreign Currency (PCFC) is being extended in
USD & EURO Currencies. Assistance in Rupees is also considered
independent of FC limits.

Quantum - need based linked to working capital gap.

Period of Credit - linked to production cycle (Maximum - 180 days)

Margin - minimum 10% and maximum 25%

Norms
Repayment - by discounting / negotiation of Export bills within a
maximum period of 180 days

Rate of interest -

For PCFC - Not exceeding 0.75% over 6 Month LIBOR.

For PCR - As per RBI guidelines and the score chart introduced by
SIDBI.

5
6