Pre-Shipment Credit in Foreign Currency (PCFC) is provided by a bank to an exporter for financing purchase, processing, manufacturing or packing of goods before shipment. PCFC’s main aim is to provide access of credit to exporters at an internationally competitive rate. PCFC is provided to an exporter based on the Letter of Credit that is issued in the name of exporter, by an overseas importer through his bank. In RBI terms any form of evidence of an order for the shipping from the country stating that an order has been places from the exporter or specific person is accepted as Letter of Credit by a bank.
Exporter can avail Pre shipment credit in two different ways, one he can be availed in the form of foreign currency which gives an advantage to access internationally competitive rates, and pay the bills in the foreign currency at the post shipment stage. These rates are taken from LIBOR (London Inter-Bank Offer Rates). Exporter can also avail Pre shipment credit in INR (Indian Rupees) and pay the bills in INR or preferred foreign currency.
Indian importers can avail PCFC in any one of the convertible currencies but at present Pre-shipment credit in Foreign Currency is given in USD, EURO and GBP subjected to availability of funds. PCFC can be extended to convertible currency regardless of which currency the export order is invoiced.
The interest rates for Pre-shipment credit in foreign currency will be taken in respective to LIBOR, the lending rates to the exporter should not exceed 0.75% over LIBOR excluding withholding taxes. LIBOR rates are available for standard period of 1,2,3,6 and 12 months. Banks can also quote rates for non-standard period but it should ensure that the rates quoted must be below the next upper standard period rate.
Packing credit in INR is available for a specific period decided by the sanctioning authorities after consideration of relevant factors with maximum period of 180 days and branches should monitor the end use of the credit. PCFC must be utilised for export purpose only and must not be deviated for domestic purpose.
Pre-shipment credit can be granted in foreign currency as well as Indian rupee but the credit limits assessment is done in Indian rupee only. Credit limits are assessed on the bases of working capital cycle at pre-shipment and post-shipment according to the existing method. The foreign currency portion is decided on the basis of Foreign Exchange Dealers Association of India (FEDAI).
Importer must make sure that there are enough margins available to cover the interest on PCFC advances. The margins on PCFC should be as per the sanctions terms or EEFC component, whichever is higher.
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 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. 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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