Decoding Packing Credit.

What is Packing credit in the export business?

Packing credit is a form of finance given to the exporters with less interest rate to boost exports. It is given by an authorized bank on the instructions of the RBI as a part of government policy to promote exporters in order to earn foreign currency which ultimately strengthens the financial status of a country.

Importance and Purpose of PC

RBI’s slogan about packing credit: ‘NO EXPORT ORDER SHOULD SUFFER FOR WANT OF FINANCE’. 

The packing credit is separate finance given to exporters who are not connected with any limit of other loans given by the bank. A separate packing credit loan account is opened for each exporter separately if needed. Once the amount of shipment is received from the overseas buyer, the said packing credit amount will be adjusted by the bank and close the loan under the said export order. Obtaining a packing credit means that all the costs related to manufacturing like working capital, raw materials, labor and machinery costs, transportation, etc. are taken care of. This is a short-term working capital advance.

Types of Packing credit:

• Pre-shipment Export Credit
• Post-shipment Export Credit

Sub-categories:

Pre-shipment Export Credit: It is a loan/ advance granted to an exporter for financing the purchase, processing, manufacturing, or packing of goods prior to shipment.

Types of pre-shipment Export Credit:

• Extended Packing Credit Loan
• Secured Shipping Loans
• Advances against Back-to-Back Letter of Credit
• Red or Green Clause Letter of Credit
• Advances against Export Incentives
• Advances Against Duty Drawback

Pre-shipment Packing Credit can also be availed in two ways:

1. Pre-shipment Credit in Foreign Currency (PCFC): It is a type of Packing Credit wherein the bank lends in foreign currency. The exporter is liable to pay back the loan in the same foreign currency to the bank. Such a facility helps the exporter community by making the credit available at internationally competitive rates. If the PCFC loan isn’t cleared within 360 days, it is then treated as a Rupee credit and the applicant is charged an exorbitant rate of interest until he/she makes the full payment in INR.
2.  Export Packing Credit (EPC): In EPC, the bank lends to the exporter in the form of the local currency.

Post-shipment Export Credit:

Means any loan or advance granted by a bank to an exporter of goods and export of services from India from the date of extending credit after shipment of goods/rendering of services to the date of realization of export proceeds as per the period of realization prescribed by (RBI). It also includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time.

Eligibility for applying PC:

Following persons are eligible for packing credit:

1. Export/Trading/Star Trading /Super Star Trading House.
2. Exporter who has received the letter of credit.
3. One who had Confirmed an export order from the overseas buyer directly.
4. The supplier of goods supporting the manufacture of the export house, who has not received the export contract directly, would be executing the contract through the export house.

In the above-mentioned case, he has to produce the letter from the export house or exporter indicating the following details about the goods:

• Description
• Quantity
• Value

With an undertaking that the export house or exporter would not avail the Packing credit to the extent mentioned in the letter. In this case, the export house or exporter and supporting supplier would share the total pre-shipment finance eligible for executing the export order to obtain packing credit.

Features of Packing Credit

1. Self-liquidation: Self-liquidating loans refer to a type of credit wherein funds are used to procure or produce goods and then, it is sold to repay the loan. Such loans are reliable in nature.
2. Lower Rate of Interest: The interest rates for packing credit differ from bank to bank but they’re generally between 4-5% which is much lower than the rates for most other loans. This helps an exporter carry out the trade without worrying about exorbitant interest rates and keeps them from falling into the jaws of loan sharks.
3. Exporter-Friendly Terms of Credit: The terms for Packing credit loans are flexible, with banks asking for repayment once the buyer makes the final payment to the supplier.
4. Period of Packing Credit Finance: The credit is granted for a maximum of 180 days but it can be further extended for 90 days with RBI’s permission. However, PCFC will be available for a maximum period of 360 days. Any extension of the credit will be subject to the same terms and conditions as applicable for the extension of rupee packing credit.

Packing Credit Finance is released in the following forms:

1. Fund based: Depends upon the stage of execution of the export order. This assumes the form of a loan when the purpose is to purchase raw materials, manufacture goods, and other incidental costs, prior to shipment of goods. The bank releases a Packing Credit loan from time to time, based on the request letter of the applicant for the packing credit and requirement stage.
2. Non-fund-based advance: It can be in the form of a letter of credit, domestic as well as import and issue of various types of guarantee, etc.

How to get Packing Credit Finance sanctioned?

In order to avail packing credit facility, the exporter has to submit the following:

1. Formal application along with the necessary documentary proof.
2. Then Exporter is sanctioned a regular packing credit limit based on the assessment of the bank in respect of the credit needs of the exporter.
3. For every export order a separate packing credit loan account is opened for proper monitoring.
4. At the time of sanction of packing credit loan, the bank obtains an undertaking from the exporter that the documents covering the shipment of goods, for which packing credit is sanctioned, will be negotiated through that bank and the packing credit account will be closed with those proceeds. e)Further, exporters also undertake to deposit any receivable from the Government such as duty drawbacks into the account. f)Disbursal of packing credit loan is made in installments depending on the schedule of production and other requirements.