Pre-Shipment finance is financial assistance extended to the exporters, prior to shipment of exports. Pre-Shipment finance can be classified as packing credit, advances against cheques or demand drafts that are received as advance payment, and pre-shipment credit in foreign currency (PCFC).
Exporter need financial assistance for the execution of an export order from the date of receipt of an export order till the date of realization of export proceeds at any stage. Export finance is a short term capital finance allowed to an exporter. Export finance can be classified into two categories; depending upon at what stage of export activity the finance is expected. One is pre shipment finance and the other is post shipment finance.
Pre-shipment credit is any loan or advance granted or any other credit provided by the bank to an exporter. This is for the purpose of financing the purchase, processing, manufacturing or packing of goods prior to shipment. Dealers are permitted to avail Pre-shipment Credit in Foreign Currency (PCFC) with an intention of making the credit accessible to the exporters at an internationally cutthroat price. This is contemplated as an additional advantage beneath which credit is issued in foreign currency in order to assist the purchase of raw material after attaining the primary export orders. This is done on the basis of the letter of credit opened in his favor or in favor of some other person by an overseas buyer or a confirmed and irrevocable order for export of goods.
Banks extend Pre-Shipment in Foreign Currency (PCFC) to exporters for domestic and imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR related Rates of Interest. Banks cover all pre-shipment advances granted by them under whole turnover packing credit guarantee policy from export credit guarantee corporation ltd. Banks determine the percentage of margin depending on factors such as; Nature of order, nature of the commodity, the capability of export to bring in the requisite contribution, nature of importer and importers country profile.
RBI has instructed the banks that PCFC, in the case of Rupee pre-shipment credit at the start is available for a particular period determined by the authority after taking into consideration on relevant factors with a maximum period of 180 days and branches should keep track of the end use of credit. Nominal guarantee fee of Export credit insurance whole turnover packing credit (ECIB-WTPC) must be borne by the exporters. This protects banks against losses due to exporter’s default.
The exporter has the independence to utilize PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. Nevertheless, the risk is correlated with the cross currency transaction is that of the exporter. The sources of funds for the banks for providing PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Resident Foreign Currency Accounts RFC(D), Earner Foreign Currency Account (EEFC)and Foreign Currency(Non-resident) Accounts.
Furthermore, Banks can set out for borrowings from abroad. Banks can negotiate terms of credit with overseas bank in order to grant PCFC to exporters, without the foregoing approval from RBI, on condition that the rate of interest on borrowing does not exceed 0.75% covering 6 month LIBOR.
Pre-shipment credit in foreign currency implies any credit offered by a bank to an exporter for financing a purchase, processing, manufacturing or packing of goods before shipment. Such a loan is granted on the basis of LOC opened in the exporters favour or in favour of some other person by an overseas buyer or a confirmed and unalterable order for the export of goods from India.
Banks are also allowed to rediscount export bills abroad at rates that are linked to international interest rates in the post-shipment stage. In order that exporters find credit available at globally competitive rates, validated dealers have be permitted to extend PCFC to exporters for domestic as well as imported inputs of exported goods at LIBOR/EURO, LIBOR/EURIBOR related rates of interest. Such can be changed and helps in the process to changeable goods.
An exporter has the following export finance options- to avail of pre-shipment credit in foreign currency; the post-shipment credit has to be necessarily under the EBR scheme as foreign currency pre-shipment credit gets liquidated in global currency.
In fact hedging by making use of pre- shipment credit in foreign currency (PCFC) has been popular in the last two-three years. PCFC offers a natural hedge and the cost of borrowing is also lower. With exception to just export currency, PCFC can be extended in currency. Say X ltd has received export order from Manila, Philippines in US dollar but X ltd has availed PCFC in EURO. In such a case, any risks that’s associated between US dollar and Euro, the cross currency risk and cost is automatically on exporter. It can also be extended to Asian Currency Union (ACU) countries.
Thus, PCFC can be applied by the exporters to meet their production needs from the banks but the only consideration that one has to keep in mind is compliance with the strict provisions. The entire process of availing credit may seem cumbersome as it demands regular verification of reports and statements. Nevertheless, to cut short the difficulties, it is advisable that exporters consider taking Advisory services for foreign exchange and trade finance. Experts of such company can offer timely support to meet the credit demands of the exporters.
Read more about Forward Contract
21 Jul 2020 06:13 PM
A country’s exchange rate and its imports and exports hold a complicated relationship as there is a constant feedback circuit between the way a country’s currency is valued and the international trade.
29 Jun 2020 05:35 PM
Dynamic hedging is a foreign exchange risk management strategy that allows businesses and individuals to readapt their hedging positions to evolving market conditions by providing flexible solutions to protect investments from exchange rate risks.
19 Jun 2020 05:01 PM
Management of Currency Exchange Risk is of paramount importance during turbulent times, like this pandemic. The currency fluctuations are very volatile and cannot be predicted as the circumstances are uncertain.
06 Jun 2020 03:59 PM
Outrights, in FX markets refer to the type of transactions where two parties agree to buy or sell a given amount of currency at a predetermined rate, on a specified date in future.
08 May 2020 05:21 PM
Converting one exchange rate into another at a particular price makes transferring rates. Ideally all nations should be treated as equal and there shouldn’t be any exchange rate applicable which would mean to have a universal currency.
24 Apr 2020 03:08 PM
Managing risk in a financial market is required to keep a check on the adverse movements in the instrument of the market. Particularly in the foreign exchange market.