Export financing was introduced in 1967 by RBI to make exporters avail short-term working capital finance. Export credit is available in rupee as well as in a foreign currency. Export credit can be availed by exporters before shipping of goods (pre-shipment export credit) or after shipping of goods (post-shipment export credit). Pre-shipment export credit or packing credit is offered to exporter for the financing of purchase, processing, manufacturing or packing of goods before shipment of goods.
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Export credit is extended to exporters on the basis of the following:
- LC issued in favour of the exporter or any other person by an overseas buyer
- A confirmed and irrevocable order for the export of goods from India
- Any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has been waived.
The period for which packing credit is granted depends upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods/rendering of services. In order to make credit available to exporters at internationally competitive rates, RBI has permitted authorised dealers to extend Pre-Shipment Credit in Foreign Currency (PCFC) to exporters for domestic and imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR.
Under the Pre-shipment Credit in Foreign Currency (PCFC), the exporters are allowed to avail pre-shipment credit in a convertible currency at interest rates not exceeding 1.0% over 6 months LIBOR plus withholding tax. LIBOR or Eurolibor or Eulibor is the reference rate. LIBOR stands for ‘London Inter-Bank Offered Rate’ and indicates a rate at which a bank in London lends a currency to other banks for a specific maturity. It is used as the basis for most Eurocurrency market. It varies for different maturity periods.
Hence, a LIBOR can be of 1 month, 3 months, 6 months, etc. Rates quoted by different banks can differ. Bigger banks may offer lower rates. With respect to a particular contract based on LIBOR, rate is fixed by nominating reference banks. The balances in EEFC, Resident Foreign Currency Accounts, FCNR (B) accounts and foreign currency balances in escrow accounts can be used to lend under this scheme or it can increase lines of credit abroad at a cost not exceeding 6 months LIBOR plus 1.0% credit under this scheme is available for 180 days maximum.
If it is extended beyond this period, a penal interest of 2% is charged. In cases where PCFC is not adjusted within 360 days, it is adjusted at TT selling rate for the currency and is treated as a Rupee advance. PCFC can be extended in one convertible currency with respect to an export order invoiced in another convertible currency. For example, an exporter can avail PCFC in US Dollar against an export order invoiced in Deutsche Mark. The risk and cost of cross-currency transaction will be borne by the exporter.
Some of the main advantages under PCFC are:
- It covers exchange risk arising out of exchange rate volatility.
- It covers the cost of buying and selling the same foreign currency from the banks, provided the facility is used for imports and imports are invoiced in the same currency as export under the order. For example, if an export order wherein, the import component is 60% and value of export order is USD 1,00,000.
Assuming that the exporter avails PCFC of USD 60,000, the liability will be adjusted by his submission of the bill in US dollars. However, if he avails rupee credit on imports, the bank will apply the bill selling rate and for the export bill submitted, the bank will apply the bill buying rate.
No conversion is involved under PCFC on USD 60000. The benefits to the exporter are that he saves the difference between the buying and selling rates for dollar and is insulated from fluctuations in exchange rate between dollar and rupee. PCFC can also be availed in rupees for local payments like materials, labor, etc. The liability of the exporter will be in foreign exchange by the applicable TT selling rate.
In case an exporter avails PCFC against an export order, the export bill drawn under that will have to be discounted with the bank under the Export Bills Discounting Scheme. PCFC will be adjusted by discounting the bill. Bill is discounted by adding interest plus LIBOR at 0.75%. The Foreign Currency Liability will be adjusted by the bank under the Export Bills Discounted account and the bank will realise the bill in foreign currency.
If any balance remains to be paid, it will be converted at the ruling TT Buying rate and paid to the exporter. If the PCFC is availed in the same currency as the invoice, there is no exchange risk. If the invoice is in Indian rupee and PCFC availed is also in Indian rupees, yet the liability of exporter under PCFC will be designated in foreign currency, e.g. US Dollar.
In such a situation, the exporter may book forward cover in the following ways:
- From the date of order/LC to the date of drawl of PCFC covering the amount of PCFC sanctioned.
- From the date of order/LC to the date of discounting, converting the invoice less PCFC sanctioned/drawn.
If however, the exporter avails PCFC in a currency other than the currency of invoice, the forward cover can be booked as:
- Forward cover in the currency in which PCFC is availed of and the rupee from the date of order/LC to the date of drawl of PCFC, covering PCFC amount sanctioned.
- Cross currency forward cover in the currency in which PCFC is availed against invoiced currency from the date of order/LC to the date of discounting.
- Forward cover from the date of order to the date of discounting between rupee and the currency in which PCFC is taken to the extent amount available after discounting of bills and repayment of outstanding PCFC.
When PCFC is availed, the contract should be cancelled at prevailing market rates to the extent the PCFC is drawn and is used for payment towards imported inputs in foreign currency.
Post-shipment export credit refers to any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from India for export of goods/services after the shipment. Post-shipment export credit runs from the date of extending credit after shipment of goods/rendering of services to the date of realisation of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time.
The post-shipment credit can be made available in foreign currency through the following avenues:
Use of on-shore Foreign Currency Funds
Banks can make use of the following on-shore sources to get funds to extend postshipment credit in foreign currency:
- Funds available in the Exchange Earners Foreign Currency Accounts, Resident Foreign Currency Accounts, Foreign Currency (Non-Resident) Accounts (Banks) Scheme. Funds in these accounts can be used for discounting usance bills and retaining them in the portfolio of bank without rediscounting. The facility can be extended as foreign exchange loan in the case of demand bills.
- Rediscounting facility can be offered by a bank which has availed banker’s acceptance facility abroad and has unutilised limits there to another bank in India.
- Banks can also avail lines of credit from other banks in India subject to a condition that the ultimate cost to the exporter should not be more than 0.75 per cent above LIBOR.
Banks Raising Funds Abroad
A Bankers Acceptance Facility (BAF) can be arranged by a bank for the purpose of rediscounting export bills without any margin and duly covered by collateral documents. The BAF limit can be fixed with an overseas bank pre-discounting agency/factoring agency (on without recourse basis for factoring). In case of large value transactions, this facility can be against bills portfolio or on a bill-to-bill basis.
Exporters Arranging Funds Abroad
Lines of credit abroad can be arranged by exporters themselves with an overseas bank/any other agency including a factoring agency. Direct discounting of export bills by an exporter with overseas bank/agency will be done through the bank branch designated for such a purpose.
This designated bank is the bank from which the packing credit facility has been availed of. In situations where the bills are routed through any other bank, the latter will first arrange to adjust the amount outstanding under packing credit with the concerned bank out of the proceeds of the rediscounted bills.