Export credits are extended by banks or financial institutions to the exporters during the pre-shipment stage and post shipment stage. In the pre-shipment stage, the loan is sought by exporter for procuring, processing, manufacturing or packing of goods prior to shipment. Thus packing credit is a working capital finance granted to an exporter to meet working capital expenses towards rendering of services.
The loans and advances provided to an exporter for procuring raw materials till the packing of finished goods ready for export is called the packing credit or pre-shipment credit. These are done against letter of credit or confirmed/irrevocable order or any other evidence of an export order. Nature of export and confirmed order through the letter of credit received by the exporter decides the amount and the period of the loan. Bank has to ensure that the credit is used only for export purpose and not diverted to other business activities. This working capital finance can be availed in Rupee or Foreign currency loan.
The packing credit availed in foreign currency called pre shipment credit in foreign currency (PCFC) has LIBOR linked interest rates and these cannot be outstanding for more than 180 days. Thus if the shipment is not done after 360 days of PCFC, the loan is converted to Rupee liability at the prevailing exchange rate. The PCFC is quoted as Libor + Spread. Libor depends on the trade cycle. Thus a 1,2,3,6 or 12 month LIBOR is chosen accordingly. Since the loan is in foreign currency, there is no need for the exporter to hedge the PCFC.
In Export Packing Credit (EPC), exporter is exposed to forex fluctuations as the loan is given in Indian Rupee. This type of credit is priced against the MCLR rates of the banks. The central bank permits banks to offer pre-shipment credit in any of the convertible currencies like USD, Euro, GBP provided funds are available.
Thus Export Credit is beneficial to the exporter and is a good opportunity for short term finance for honoring the export order.
Read more about export & import finance
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