Nov 13 2018

Pre-Shipment Credit in Foreign Currency

PCFC basically refers to pre-shipment finance in foreign currency. Pre-shipment finance in simple terms refers to the finance raised by the seller of goods in order to manufacture those goods and bear all the expenses related to the sale till the time payment is received by the seller. This usually takes place in case of export and import of goods. Pre-shipment finance is formal language is the loan or credit provided by a bank to the exporter of goods and services for purchasing raw material, processing them into finished goods and packaging prior to shipment of goods to the country of import. The loan is granted on the basis of letter of credit that is opened in the favor of exporter by an overseas buyer or on the basis of a confirmed or irrevocable order to supply goods or any other evidence in favor.

Exporters have an option to avail the credit at pre-shipment stage in rupees and to repay post shipment in rupees or foreign currency. They also have the option of availing pre-shipment credit in foreign currency and discount the export bills in foreign currency at post shipment stage. To make loan or credit available to exporters or sellers at internationally competitive rates, the government has allowed authorized dealers to extent pre-shipment credit in foreign currency to exporters of goods at LIBOR/EURO LIBOR/EURIBOR related interest rate.

What is the Currency of credit?

The reserve bank of India has granted permission to provide pre-shipment credit to the seller in any of the convertible currencies. However, at present pre-shipment credit in foreigncurrency or PCFCIs being granted in US Dollars, GBP & EURO according to the availability of funds. PCFC can be extended in one convertible currency in respect of an export order invoiced in another convertible currency at the risk and cost of cross currency transaction to the exporter. It will be on account of the exporter and the exporter is liable for such charges or expenses. PCFC can also be provided for exports being made to ACU nations.

What is the Period of Credit in PCFC?

In India, PCFC as in case of rupees the pre-shipment loan is initially made available for a specific time duration as decided by the sanctioning authority after taking into consideration the relevant factors with a maximum 7 duration of 180 days and branches to monitor the end use of credit as in the case of rupee credit. It is essential to ensure that funds granted under the pre-shipment credit in foreign currency are not used for any domestic purposes.

What are supposed to be the Credit Limits?

The export limits can be sanctioned in both Indian rupee and foreign currency. However, the assessment is done in Indian rupee which is bases upon the working capital cycle including at pre-shipment and post shipment according to the existing methods, the foreign currency portions worked out on the basis of latest available FEDAI rate. Once the foreign currency portion is worked out PCFC outstanding is controlled in foreign currency

What is the Rate of interest Charged?

The interest rate on pre-shipment credit in foreign currency is based upon the ongoing LIBOR/ EURO LIBOR / EURIBOR for the appropriate time duration at the time of advanced plus sanctioned spread. LIBOR / EURO LIBOR / EURIBOR are generally available for a standard or normal period of 1, 2, 3, 6 and 12 months. There is a possibility for the rate of interest to change in accordance with the movement of LIBOR, thus affecting the rate and resulting in different rate at each time of drawl. Banks can avail lines of credit from banks abroad in order to fund the PCFCs. In this case withholding tax payable by the borrowing banks is to be passed on to the borrower.

What is the appropriate Margin?

Margin on Pre- Shipment Credit in Foreign Currency should be in accordance with the sanction stipulations. The actual margin to be maintained is the margin as per the sanction terms or EEFC component, higher of the two. It is to be ensured that there is enough margin available in order to cover the discount or interest on the foreign currency bills discounted at the post shipment stage

What is the Amount of Credit granted?

For operational convenience, amounts granted under Pre-shipment credit in foreign currency or PCFC are restricted to a specific minimum which is presently US$ 10,000/-. recourse basis.

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