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 LCs 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 Packing Credit 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. The EPC exporter needs to watch out for forward premium and interest rate subvention. Government of India gives a grant to certain industries to promote export and employment opportunities. Knowledge of hedging strategies is a must for the exporter to maximize on the forward premium and to minimize the risk associated with the EPC.
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