EXPORT FINANCE - PRE-SHIPMENT CREDIT

FCNRB loans: No authority below CCC-I can sanction FCNRB (TL) vide FD letter no. P & S/123 dt. 10.12.03
1. An exporter may require financial assistance at pre-shipment and/or post-shipment stage. Pre-shipment finance, also referred to as Export Packing Credit (EPC), is extended as working capital for purchase of raw materials, processing, packing, transportation, warehousing etc., of goods meant for exports. Post-shipment finance is extended after shipment to bridge the time-lag between the shipment of goods and the realisation of proceeds. Export finance is by and large governed by RBI directives / guidelines. For instructions on Post-shipment finance, please refer to Chapter 13-2. Pre-shipment credit can be classified as (a) Packing Credit, (b) Advance against Duty Drawback entitlements, and (c) Preshipment Credit in Foreign Currency (PCFC). Other facilities to exporters: In addition to the aforementioned Pre-shipment credit facilities, the Bank extends the undermentioned facilities to exporters: i) Execution of Bid Bonds/Tender Guarantees: Bid bonds/tender guarantees are issued in favour of overseas buyers in lieu of earnest money. Such guarantees have to be submitted by the exporters at the time they participate in tenders for the supply of goods/services abroad. ii) Issue of guarantees in respect of advance payments: Bank guarantees are issued in favour of overseas buyers in respect of advance payments to be made by them. Such advance payments are a common feature in contracts pertaining to export of capital goods or turnkey jobs. iii) Establishment of Letters of Credit: Letters of credit are issued at the request of exporters in favour of suppliers of raw materials, components, services etc. Similarly, back-toback letters of credit are issued at the request of export houses and merchant-exporters in favour of domestic manufacturing units for the supply of goods contracted for export.

iv) Arranging lines of credit in foreign countries: This facility is usually required where the execution of an export contract involves work to be done in the buyers country. The local costs may be financed by arranging a line of credit from a foreign branch or a correspondent bank against the Banks guarantee, wherever necessary. v) Execution of Performance Guarantees: At the request of exporters, the Bank issues guarantees for the performance of machinery, equipment, etc. supplied by them. Such guarantees are generally stipulated in contracts pertaining to the export of capital goods or turnkey jobs. Guarantees are also issued in lieu of retention money. While extending export credit facilities, branches should be governed by the internal guidelines, the guidelines issued by the Reserve Bank of India (DBOD/IECD/ECD), the rules of the Foreign Exchange Dealers Association of India (FEDAI), the Trade Control and provisions of FEMA, Codes of the International Chamber of Commerce viz., UCPDC, URC etc, 3. 3.1 Packing Credit Packing Credit advance is granted to eligible exporters for the purpose of purchasing/manufacturing/processing/ transporting/ warehousing/ packing and shipping, etc., of the goods meant for export. Even though this advance granted to the exporter (and in some cases even to the sub-suppliers who are not exporters) for procuring the goods from the market may be of a clean nature at initial stage, it should be converted into secured advance as soon as the goods are procured by the exporter and are undergoing further processing/manufacturing, by hypothecating the goods in the name of the Bank. The security offered may further be perfected by pledging the goods to the Bank when the physical / constructive custody of the goods remains with the Bank or Banks approved clearing agent. However, this stage will arise when the goods are ready for shipment and do not require further processing. Packing credit advance is generally available to the eligible exporter against lodgement of irrevocable LC established/transferred in his favour by the foreign buyer through the medium of a First Class bank or confirmed order/contract placed by the buyer for export of goods from India. However, branches may grant advances without insisting on lodgement of LC or confirmed order/contract at initial stage, in case of exporters with good track record and if the reasons for delayed submission of LC/orders are genuine. In case LC or confirmed order/contract is expected in the near future, the relevant evidence which may be in the form of a cable/telex, is

3.2

also acceptable subject to the condition that such communication contains at least the following information: a) Name of the buyer b) Value of the order c) Quantity and particulars of the goods to be exported d) Date of shipment e) Terms of payment Submission of export order or LC need not be insisted upon for every disbursement of pre-shipment credit in case of exporters with consistently good track record for whom running account facility may be granted as explained in paragraph 3.11 below. Instead, periodical statements at monthly intervals of LCs or export orders in hand should be obtained by branches and scrutinised meticulously. Final contract/ LC shall be produced at a later stage as and when available. However, it should be ensured that there is no double financing. Packing credit is normally granted to the following categories of exporters: a) b) Manufacturer Exporter, i.e., an exporter who actually manufactures the goods and exports in his own name. Merchant Exporter, i.e., an exporter who is a trader (intermediary), and who does not manufacture the goods himself but buys the same from another supplier (domestic or foreign) who is the actual manufacturer, and exports the same in his name. The exporter in such cases is also called the Export Order Holder (EOH). Export House, i.e., a Manufacturer Exporter or a Merchant Exporter with minimum export turnover prescribed under the prevailing trade policy.

c)

While as a general rule, packing credit can be granted to the above categories of exporters, there is another category of borrowers - suppliers/sub-suppliers - who could also be extended pre-shipment advance/packing credit. Details on this are given in paragraph 3.14 below. 3.3
3.3.1

Assessment of Export Packing Credit (EPC) - Basic considerations EPC is basically a working capital finance and the assessment has to be made exactly on the lines of assessment done for normal working capital advances. The following points should be kept in view by branches while appraising/assessing a packing credit proposal, besides the usual norms like integrity,

creditworthiness of the borrower and export performance for the last 2/3 years, where applicable. There is no fixed formula for determining the quantum of finance to be granted to an exporter against specific orders / LCs. The guiding principle to be applied in all such cases is the concept of need based finance. The period for which the Bank gives packing credit depends upon the manufacturing / trade cycle or specific requirements of the individual export, normally not exceeding 180 days. The percentage of margin is determined depending on the nature of order, commodity, capability of exporter, etc. keeping in view the spirit behind RBI guidelines for liberal finance to export sector. (i) Advance is generally granted within Banks laid down assessment procedures to the bona fide exporter-customer of good standing who maintains an account with the Bank. The quantum of finance sought should be commensurate with the expected turnover and the needs of the exporter. Exporter should comply with the Exchange Control Regulations, e.g. the exporter should hold an Exporter's Code Number allotted by the Directorate General of Foreign Trade (DGFT) . This condition is not applicable for pre-shipment finance granted to sub-suppliers. Similarly, wherever applicable, the exporter should also possess an export license/quota granted by the Export Promotion Council. Exporter should be able to satisfy the Bank about his capacity to execute the order within the stipulated time and to manage the export business. Branches should satisfy themselves about the standing of the LC opening banks. Branches should also look into the regulations and the political and financial conditions of the importer's country. If the goods to be exported involve imports of raw material/components, appropriate arrangements should have been made by the exporter for such imports. Branches must make sure that the country of import is not under "Restricted Cover" by ECGC/Bank or the exporter is not on "caution list" of Reserve Bank of India or on the Specific Approval list of ECGC.

(ii)

(iii)

(iv) (v) (vi)

(vii)

(viii) EPC loan is given normally not exceeding the FOB value of order/LC or domestic cost of production, whichever is less, irrespective of sales contract terms. Exceptions:

a) The pre-shipment advance can be made available to the extent of domestic market value of the goods even though such value is higher than the FOB value of the goods, provided the goods are covered by Export Incentive Scheme of Government of India/ Duty Drawback Scheme. In such cases, excess advance should be liquidated from the Cash Incentive/ Duty Drawback received b) Reserve Bank of India has permitted banks to grant packing credit advances to exporters of Hand Picked and Selected (HPS) groundnut and of deoiled and defatted cakes against the security of oilseeds and/or other raw material (e.g. groundnut, rice bran, etc.) to the extent of the value of raw materials required, even though the value thereof exceeds the value of the export order. The advance in excess of export order is required to be adjusted either in cash or by sale of residual groundnuts or by-product oil, as soon as the selection of HPS ground nut/extraction of oil is completed but within a period not exceeding 30 days in case of export of deoiled and defatted cakes and 15 days in case of HPS groundnuts from the date of advance. The balance in the packing credit advance is to be adjusted by the proceeds of the relative export bills.
(xii)

In the case of manufacturer-exporters having both domestic operations and export business, branches should assess the aggregate working capital requirements of the borrower and sanction limits on the basis of the requirements so computed with an appropriate allocation for packing credit. Interchangeability between domestic and export limits on account of change in the mix of domestic and export turnovers may also be considered after a detailed examination of the circumstances requiring such interchangeability. Similarly, need based interchangeability between pre shipment and post shipment credit limits may be permitted to take care of bunched export orders or physical exports. In this regard, branches should comply with the instructions in force in respect of i) the authority for permitting such interchangeability and ii) the extent to which such interchangeability can be permitted. In cases of manufacturing units, for overall fund based limits up to Rs.25 lacs, the simplified formats of application and assessment prescribed by RBI for SSI units should be used. For limits of Rs.25 lacs and above, PBS method, turnover method or cash budget method may be adopted for assessment of working capital for exporter customers

(xiii)

as is most suitable and appropriate to their business requirements. For detailed instructions on these assessment methods, please refer to Chapter 7.
(xiv)

While assessing the working capital limits for export oriented units, relaxations are permissible in respect of NWC, Current Ratio, collateral security etc. For instance, projected low CR may be accepted provided profitability and cash flow are acceptable.

3.3.2

For non-borrowers requiring finance for specific export orders and for borrowers wanting ad hoc packing credit limits, the assessment method is the same as indicated above. After the application from the intending borrower is checked for its completeness as also whether it is signed by the authorised signatory of the firm/company, the eligible limit/loan amount has to be determined against that LC/firm order. At the time of processing such proposals, the undernoted documents should be obtained from the applicant. a) Undertaking that advance will be utilised for the specific purpose of procuring/manufacturing/shipping, etc., the goods meant for export only as stated in the relative confirmed export order/LC. If the customer wants to avail of packing credit advance against preliminary information of contract whereby at a later stage the contract or LC, as the case may be, will be received by him, an undertaking to the effect that the same will be produced to the Bank within a reasonable time for verification and endorsement.

b) Confirmed export order/contract or LC, etc. in original. c)

d) If the customer asking for packing credit is a sub-supplier and wants to supply the goods to the Export House or Merchant Exporter, an undertaking from Export House/Merchant Exporter stating that they have not/will not avail of packing credit facility against the same transaction for the same purpose till the original packing credit is liquidated. e) Security documents e.g., D.P. Note, packing credit agreement, letter of guarantee where there is a guarantor or any other specified documents as stated in the sanction advice of the Bank for the purpose. Wherever necessary, these documents should be adequately stamped.

3.3.3

Branches can also make advances to exporters(suppliers) who do not have letters of credit or firm orders in their own name and are routing their exports through the State Trading Corporation/

Minerals and Metals Trading Corporation or other Export Houses, agencies, provided the following requirements are fulfilled. a) Branches should obtain from the export house a letter setting out the details of the export order and the details of the portion thereof to be executed by the supplier and also a certificate that the export house has not obtained and will not ask for packing credit facility from any bank in respect of such portion of the export order as is to be executed by the supplier, till the sub-exporter is paid by them in full towards value of such order. The export house should open inland letter of credit in favour of the supplier giving relevant particulars of the export letters of credit/orders and the outstandings in the packing credit account should be extinguished by negotiation of bills under such inland letters of credit. If it is inconvenient for the export house to open such inland letters of credit in favour of the supplier, the latter should be allowed to draw bills on the export house in respect of the goods supplied for export and adjust packing credit advances from the proceeds of such bills. In case, the bills drawn are not accompanied by bills of lading or other export documents, branches should obtain through the supplier a certificate from the export house at the end of every quarter that the goods supplied under this arrangement have in fact been exported. The certificate should give particulars of the relative bills such as date, amount and the name of the bank through which the bills have been negotiated. Branch should obtain an undertaking from the supplier that the advance payment, if any, received from the export house against the export order would be credited to the packing credit account. EPC and other related

b)

3.4
3.4.1

Procedure for disbursement of formalities

The terms and conditions of the credit facilities granted should be advised by the Bank to the exporter by an arrangement letter. The exporter would have to execute such set of documents as are prescribed by the Bank. In case of advance to companies, it would be necessary to register the charge with the Registrar of Companies. Branches should also obtain a suitable Board Resolution before granting the advance. prior to the disbursal of the packing credit advance except when the advance is sanctioned on running account basis. Branch

3.4.2 Export orders/letters of credit should be deposited with the Bank

will affix on the export order/letter of credit lodged with them a rubber stamp reading Export finance granted. Where it is not possible for the exporters to lodge the letters of credit or firm orders initially, the branch may make pre-shipment advance to the exporters on the production of sufficient evidence e.g., fax, letters, etc. but it should be ensured that the aforesaid documents are lodged with the branch within a reasonable time (i.e. 30 days) from the grant of advances. In such cases, branch must follow up the matter with the exporter, for submission of firm order/LC, etc., and take necessary undertaking to submit the same within a reasonable period. In case of exporters with consistently good track record, subject to notice of the same to ECGC, statements of export orders/LCs in hand may be obtained at monthly intervals in lieu of submission of individual export orders/LCs under Running Account Facility.
3.4.3

Unless the advance is given on a running account basis, the amount advanced should be recorded in the relative order/letter of credit under the signature of an authorised official. The particulars of each order/letter of credit must be entered in the packing credit (orders) register at the time the advance is granted. All amounts disbursed as packing credit advances should be debited to the relative packing credit account and credited to the borrowers operative account. Operations on the packing credit accounts by cheques should not be permitted. Where warranted, disbursement may be in stages. At the time a packing credit advance is granted, the expiry date of the order/letter of credit should be diarised. In case bills are not tendered before such expiry date, the reasons therefor should be enquired into. If there is no likelihood of the shipment taking place, immediate steps should be taken to recover the advance. Further, ECGC should be kept advised of the developments inasmuch as export finance is required to be covered under ECGC Guarantee on whole-turnover basis (WTPG) or individual guarantee basis. It must be ensured that the Banks interests are safeguarded at all times. In the case of packing credit advances secured by pledge/hypothecation of stocks, drawing power on the relative packing credit account should be determined on the basis of the aggregate value of firm orders/letters of credit lodged and outstanding or the advance value of stocks pledged/hypothecated to the Bank, whichever is lower. The repayment period is the processing/shipment time, the validity of export order or 180 days, whichever is the earliest.

3.4.4

3.4.5

3.4.6

3.4.7

Branches should maintain a packing credit drawing power register wherein the drawing power available to each borrower should be recorded under the signature of an authorised official. Amounts of orders/letters of credit lodged and repayments of the advance granted thereagainst should be recorded in this register. All RRs/TRs representing movement of goods to port towns should be handed over by exporters to the Bank with shipping instructions to the approved shipping agents. Usually, the shipping agents will send the Bill of Lading directly to the Bank. Exporters should be required to insure their stocks against fire and theft for full value. Goods-in-transit to port towns/Customs house/airline companies should also be insured. Insurance from port of loading/air freighting to the port of destination should also be arranged, unless this is the responsibility of the importer. Monitoring and control Since packing credit loans are at concessional rates of interest and specific purpose oriented advances, it is the responsibility of branches to ensure proper end use of the amounts disbursed by the exporters. Advances should not be disbursed in lump sum amounts, instead they should be disbursed in a phased manner taking into account specific purpose and needs of the exporter, shipment schedules, production cycles and other aspects. They should also monitor the progress made by the exporters in timely fulfillment of export orders. All the instructions contained in the sanction letter for the limit should be strictly adhered to by the borrowers. Rules regarding submission of stock statement and insurance would also have to be complied with by them. As far as possible, to ensure the end-use of funds, loan amount should be disbursed directly by the branches by issue of pay orders/drafts in the name of suppliers, for which necessary authorisation letter is to be taken from the borrower. Where direct disbursals are not possible, the proceeds may be credited to borrowers account and disbursals therefrom should be supervised. If loan proceeds are credited to the current account or cash credit account, cash withdrawals for small payments/labour payments may be allowed. Barring this, all payments should normally be made by pay orders /drafts drawn in favour of suppliers except in cases where trade practice (as in some agricultural or marine products) demands that cash payments be made usually. In such cases, the sanction accorded by the Sanctioning Authority should provide for it.

3.4.8

3.4.9

3.5
3.5.1

3.5.2

3.5.3

3.5.4

Packing credit advances may be granted up to the full value of export orders, but in stages corresponding to the actual requirements of finance for the execution of the orders. When disbursement is to be made in stages (depending upon the needs of the exporter), the schedule of disbursement may be called for before granting the advance. Due date diary should be maintained showing the due dates of repayments and it should be ensured that documents are received well in time or proper extension applications are obtained from the exporter wherever necessary. Where stipulated, separate periodic stock statements for export stocks should be obtained and stocks inspected. ECGC premium should be paid at the prescribed periodicity on all outstanding packing credit advances. Wherever applicable, it should be checked whether notification to ECGC/ ECGC approval is on record especially in the case of reporting of defaults, nursing of accounts or exports to restricted cover countries etc. If export takes place and the bill is purchased/ negotiated/discounted etc. such export proceeds or any advance remittance received covering the relative export order/shipment should be adjusted through the packing credit account and the relative packing credit account should be closed. In this regard, if the exporter makes a request to adjust the proceeds otherwise, this should not be acceded to. For a proper control over the pre-shipment credit granted to exporters, other than on running account basis, it is necessary for the branches to maintain separate accounts in respect of each packing credit granted to an exporter. The pre-shipment credit is required to be liquidated from the proceeds of the relative export bill when purchased, negotiated or discounted as the case may be. However, if the exporter who has availed of pre-shipment credit, is confronted with the cancellation of the export order against which he obtained the advance and is therefore not in a position to tender export documents for adjustment/ liquidation of the advance by the relative export proceeds, the outstanding advance can be adjusted against the export bill drawn on some other importer either in the same country or in any other country, provided the relative export bill is in respect of the same goods for which pre-shipment credit was originally granted. a letter of credit or firm order is not the sole criterion for granting packing credit in respect of ready made garments, fabrics, etc.

3.5.5

3.5.6 3.5.7

3.5.8

3.5.9

3.5.10 Liquidation of Packing credit - Garment exporters: Production of

as exports of these items are in certain cases made on the basis of Quota Certificate/allotment by Apparel Export Promotion Council (AEPC). Branches should insist on exporters obtaining Quota Certificates from the appropriate Export Promotion Council within a reasonable time of permitting drawals and ensure that drawals are not allowed to be availed of entirely in anticipation of Quota. Wherever Quota restrictions are there, branches should ensure that the outstandings are liquidated from the export proceeds out of the Quota. 3.6 Besides the above, Banks all other guidelines on monitoring of cash credit/WCDL(see Chapters 6 and 8) applicable mutatis mutandis to EPC. Security Export packing credit advances, as a general rule, should be secured by pledge or hypothecation of stocks. Inasmuch as the bulk of the finance is normally required for the procurement of raw materials and for processing them into finished goods or for purchasing goods for export, there should ordinarily be no difficulty in obtaining pledge or hypothecation of stocks. Manufacturer-exporters having extensive domestic operations as well as export business, may not find it feasible to segregate stocks of goods meant for export and pledge/hypothecate them separately to the Bank. In such cases, it would suffice if it is ensured that the aggregate outstandings in all accounts (domestic cash credit account(s) as well as export packing credit account) are fully covered by the advance value of the stocks pledged/hypothecated to the Bank. Collateral Security: In addition, where considered necessary, branches may obtain collateral security by way of third party guarantee /equitable mortgage of immovable property. In this connection, branches must keep in mind that the assessment of export credit (both pre- and post- shipment) should be needbased and not directly linked to the availability of collateral security. As long as the requirement of credit limit is justified on the basis of the exporters performance and track record, the credit facilities should not be denied merely on the grounds of non-availability of collateral security. Guarantees and policies of the ECGC: Bank has obtained a Whole Turnover Packing Credit Guarantee of ECGC to cover all packing credit advances with the exception of those granted to public sector corporations sponsored by the Central Government. The constituents to whom limits for purchase/discount of noncredit bills or medium-term export loans are sanctioned should

3.7 3.7.1

3.7.2

3.7.3

3.8

be required to secure cover against commercial and/ or political risks by obtaining the standard policies/Shipping Comprehensive Risks Policies issued by ECGC. Such policies should be assigned in favour of the Bank by means of Special Authorisation Letters duly registered with ECGC. In addition, Post Shipment Export Credit Guarantees may be obtained, wherever considered necessary. The details in respect of various types of guarantees and policies being issued by ECGC in favour of banks and exporters respectively are contained in Foreign Department circulars issued from time to time and branches should be guided by the instructions contained therein. 3.9 Period for liquidation of pre-shipment advances 3.9.1 The period for which a packing credit advance may be given by the Bank depends upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary), and shipping the relative goods. It is primarily for the Bank to decide the period for which the packing credit advance may be given having regard to the various relevant circumstances, but it should be sufficient to enable the exporter to ship the goods. Normally, this period should not exceed 180 days. 3.9.2 Extension of time limit for liquidation of pre-shipment credit: Branches may extend time for liquidation of pre-shipment credit for periods beyond 180 days, subject to the following conditions. i) Extension of pre-shipment credit for periods beyond 180 days, for a further period of 90 days, provided the reasons for extension are due to circumstances beyond the control of the exporter. ii) Pre-shipment credit, wherever necessary, up to 270 days ab initio on account of longer production cycle or seasonality of the availability of raw material or trade practice prevalent in respect of a particular commodity or time normally taken for shipment, etc. iii) Branches should show the finance outstanding for the two periods separately in weekly abstracts. iv) In cases where the realisation period exceeds 180 days (deferred exports), normal lending rate based on the credit rating of the borrower may be charged. Exim Bank refinance is available against such credit at concessional rates and the benefit can be passed on to the exporters. All deferred exports

are subject to regulatory guidelines contained in Project Export Manual (PEM) published by RBI. In this connection, extensions in the period should be allowed only in genuine cases and for valid reasons. In order to ensure that the preshipment credit does not remain locked up for unnecessarily long periods, branches should monitor the progress made by exporters in timely fulfillment of export orders so that the period of the credit does not exceed the actual requirement of the borrower. 3.10 Adjustment materialise of pre-shipment credit when exports do not

i) If pre-shipment advances are not adjusted by submission of export documents within 180 days( after the initial maximum period of 180 days for which the advances are granted), the advance will attract a higher interest rate for the period exceeding 180 days up to 270 days (i.e. for the additional 90 days). If shipment takes place after 360 days from the date of advance, the advance will cease to qualify for concessive rate of interest ab initio and interest rate applicable to Export Credit Not Otherwise Specified should be charged from the date of advance. ii) In case, however, exports do not materialise at all, branches should charge on the relative packing credit, domestic lending rate plus penal interest not exceeding 2 per cent per annum, from the date of advance. 3.11 Running Account Facility Packing credit finance is permitted to be given on a Running Account basis i.e., the first debit in the account is adjusted/repaid against the first credit to the account irrespective of the fact that the packing credit loan pertaining to the first debit may not relate to the export order under which the export bill is submitted for negotiation/ purchase/ discount, etc. Branches may extend pre-shipment credit on "Running Account" basis for any commodity depending upon their judgement for the need of the facility provided: a) b) c) Need for such facility has been established by the exporters to the satisfaction of the branch concerned. The facility is made available only to those exporters whose track record has been satisfactory. The relative Letter of Credit/Confirmed Order should be produced by the exporter in a reasonable time after availment of pre-shipment finance. In case the commodity

in question is covered by the selective credit control, the production of the letter of credit/confirmed order within one month from the date of availment is necessary. d) The individual export bills should be marked off, as and when they are received for negotiation and collection, against the earliest outstanding pre shipment credit on "First-in-First-out" basis. In any case, the concessional credit should not be permitted to exceed the prescribed period of 180 days. Where the amount of the pre-shipment credit exceeds the value of export order (to procure the raw materials required for executing the export order as in the case of HPS ground nuts, de-oiled cakes etc.), the excess amount should be adjusted either in cash or by sale of nonexportable by-products, within a period of 30 days from the date of advance. Reserve Bank refinance will be available only for the export finance not exceeding 180 days.

e)

f)

g) Branches should constantly review the drawals in the account vis-a-vis the export bills tendered for negotiation/collection for adjusting the pre-shipment credit and ensure that the facility is not mis-used by the exporter by drawing funds in excess of their genuine requirements for inventory buildup/other purposes. In such cases, the facility should be withdrawn forthwith and branches should insist on production of firm order/LC before granting pre-shipment advance. 3.12 Packing credit for export of consultancy services and computer software In case of consultancy services and computer software, exports may not involve actual movement of goods. In such cases, pre-shipment finance at concessional rate of interest can be extended to exporters to enable them to undertake preliminary arrangements such as mobilising technical and other staff and training them or for purchase of any materials required for the purpose. While deciding about the pre shipment facilities, branches must take into account the advance payments received against the contract. For instructions on financing of software exports, please refer to Chapter 30(1). 3.13 Finance against goods for exhibition and sale abroad Branches may provide finance against goods for exhibition and sale abroad in the normal course in the first instance and after the sale is

completed, allow the benefit of concessional rate of interest on such advances both at the pre-shipment stage and the post-shipment stage, up to the stipulated period, by way of rebate. 3.14 Packing credit to sub-suppliers When a merchant exporter or an export house having received a confirmed order or LC, needs to procure goods and get the same processed/manufactured by another supplier or manufacturer (referred to as a sub-supplier or a supporting manufacturer), it can share the facility of concessional export finance with such supporting manufacturer/sub-supplier subject to the normal exchange control regulations relating to exports. In such a case, the manufacturer/subsupplier normally avails of the export packing credit and supplies goods to the merchant exporter/export house (who holds the export order-also called EOH) against payment or against an inland LC or any other similar arrangement. The broad details of this arrangement and guidelines in this regard are as under: a) The scheme will cover the LC or export order received in favour of Export House/Trading House/Star Trading House etc. or manufacturer exporters only. It will be made available to exporters with good track record only. b) Branches should ensure that there is no double financing of the export order and the relative Letter of Credit under the above arrangement. The total finance related to the execution of the export order and the period of export packing credit should be shared between the manufacturer (supplier) and the export house/merchant exporter (EOH). EOH has to give a disclaimer letter to the effect that he would not be availing of any export packing credit to the extent availed of by the manufacturer/supplier. For assessing the working capital requirements of the manufacturer/sub-supplier, any advance payment made by the EOH to the manufacturer/sub-supplier is required to be taken into account. c) Running Account facility should not be given to the subsupplier or a supporting manufacturer. d) The EOH will have the option to open inland LC through his bank in favour of his sub-supplier(s) on the basis of the export order or LC received by him. Thus, the banker to an EOH will open an inland LC specifying the goods to be supplied by the sub-supplier to the EOH as a part of the export transaction. On the basis of such a LC, the sub-suppliers banker will grant EPC

as working capital to enable the sub-supplier to manufacture the components required for the goods to be exported. On supplying of the goods, the LC opening bank will pay to the sub-suppliers banker against the inland documents received on the basis of inland LC issued and the EPC availed of by the sub-supplier will be liquidated. Such payments will thereafter become the EPC of the EOH. e) It is up to the EOH to open any number of LCs for the various components required with the approval of his banker/leader of consortium of banks within the overall value limit of the order/LC received by him. Taking into account the operational convenience, it is for the LC opening bank to fix the minimum amount for opening such LCs. The total period of packing credit availed by the sub-supplier(s), individually or severally and the EOH should be within normal cycle of production required for the exported goods. For example, where sub-supplier manufactures the goods by availing of packing credit and again the merchant exporter avails of finance to further process/ pack/ship the same goods, it should be ensured that total period for which both parties avail of packing credit does not exceed the maximum period permitted for concessional finance. The total period will be computed from the date of first drawal of packing credit by any one of the sub-suppliers to the date of submission of export documents by EOH. f) The scheme will cover only the rupee packing credit. The finance given to both the sub-supplier(s) and EOH will attract interest at the rates as per RBIs directives on the rates of interest for packing credit for the specified period as announced by RBI from time to time. g) The LC opening charges will generally be borne by the EOH who may recover the same from his sub-suppliers depending on their terms of sale. h) The EOH will be responsible for exporting the goods as per export order/LC and any delay in the process will subject him to the penal provisions issued from time to time. Once the subsupplier makes available the goods as per terms of inland LC to the EOH, his obligation of performance under the scheme will be treated as complied with and penal provisions will not be applicable to him for delay by EOH, if any. i) The scheme will cover only the first stage of production cycle. That is, the manufacturer exporter is allowed to open inland LC in favour of his immediate supplier(s) of raw materials, components, etc. required for manufacture of exportable goods. But the scheme will not cover the suppliers of raw materials,

components, etc. to such immediate suppliers. In case, the EOH is merely a trading house, the facility will be available commencing from the manufacturer to whom the order has been passed on by the trading house. j) When a supplier wants to avail of the facility of preshipment advance/packing credit against the export contract or LC received in the name of an Export House or any Merchant Exporter, he should submit to the Bank a letter from the Export House/ Merchant Exporter incorporating details of the goods to be supplied and confirming that he has not availed of any packing credit from any other bank/source against the same contract/LC. Repayment of such advance should be against the proceeds of the bill drawn under Inland LC (Back-to-Back LC) opened by the Export House/Merchant Exporter in favour of the sub-supplier. Where it is inconvenient to open Back-to-Back-LC, sub-supplier can draw bills on the Export House/ Merchant Exporter and adjust the advance from the proceeds of such bills. However, if the bill is not accompanied by a Bill of Lading indicating that the export is effected, a certificate should be obtained from the Export House/ Merchant Exporter stating that the goods have actually been exported. k) The credit extended under the system will be treated as export credit from the date of advance to the sub-supplier to the date of liquidation by EOH under the inland export LC system and up to the date of liquidation of packing credit by shipment of goods by EOH. In such cases, refinance from RBI to the respective banks will be available for appropriate periods. It is necessary to ensure that no double financing of the same leg of transaction is involved. l) The scheme does not envisage extending credit by a subsupplier to the EOH/manufacturer and thus the payment to subsuppliers has to be made against submission of documents by LC opening bank treating the payment as packing credit of the EOH. EOUs/EPZ units supplying goods to other EOU/EPZ unit for export purposes are also eligible for rupee packing credit under this scheme. But the supplier EOU/EPZ unit will not be eligible for any post shipment facility as the scheme does not cover sale of goods on credit terms. 4. Pre-shipment finance Entitlements - Advance against Duty Drawback

Export credit can be given at pre-shipment level for an amount in excess of export order, the excess representing the amount of duty drawback recoverable from appropriate authorities provided the transaction is covered by Export Production Finance Guarantee of

ECGC. In such cases, excess advances should be liquidated from Duty Drawback received. Since export documents are to be in the name of the exporter who alone would be entitled to duty drawbacks recoverable from appropriate authorities, the inland LC in favour of sub-supplier can be issued for an appropriate amount higher than the relative export order or the LC from abroad. This is to ensure that the manufacturer gets packing credit to cover full manufacturing cost which may be more than the export value of the order. The excess representing duty drawback receivable will be eligible for interest at concessionary rate. Overdraft/cash credit limits sanctioned to exporters for financing their receivables on account of duty drawbacks should, as a rule, be secured by hypothecation of duty drawback entitlements. Wherever the disbursing agencies are prepared to accept irrevocable letters of authority/ powers of attorney in favour of the Bank and agree to effect payment to the Bank direct of claims lodged by the exporter, such letters of authority/powers of attorney should be obtained from the borrowers and registered with the disbursing agencies concerned. A suitable margin may be retained on the duty drawback receivables financed depending on the credit risks. 5. 5.1 Pre-shipment Credit in Foreign Currency (PCFC) The scheme of Pre-Shipment Credit in Foreign Currency (PCFC) enables the exporters to avail packing credit at international interest rates through Authorised Persons. The Scheme covers the cost of both domestic as well as imported inputs of exported goods. Guidelines on the Scheme are formulated by the International Division (Planning), IBG Corporate Centre. The following are the extant guidelines to be followed by the branches. Designated branches: The scheme will be operated only at the designated branches as advised from time to time by the International Division (Planning), IBG Corporate Centre. Exporter-customers of non-designated branches (NDBs) can avail of the PCFC facility at the nearest designated branch (DB). The methodology for conducting the transactions of NDBs at DBs is detailed in Annexure - Export-1. Eligibility: All exporters, having firm export orders/irrevocable letters of credit are normally eligible for PCFC, subject to satisfying other credit norms. As regards existing customers, PCFC can be carved out of the EPC limits available to them subject to the outstandings under both the rupee and foreign currency facilities (converted at the prescribed notional rate) not

5.2

5.3

exceeding the limits sanctioned. There is no need for sanction of a separate sub-limit for PCFC. Export Packing Credit (EPC) in Rupees in part and PCFC in part can be granted against the same export order. Exporters desirous of availing PCFC are obligated to discount the export bills under Export Bills Rediscounting Abroad Scheme (EBR). The EBR scheme is detailed in paragraph 10 of Chapter 13-2. 5.4 Running Account facility: Running Account facility is permitted in the case of exporters with good track record but not automatically to their/sister/associate/group concerns. For this purpose, exporters whose overdues do not exceed 5% of the average annual export realisations during the preceding three calendar years may be considered as exporters with good track record.

In all cases where running account facility has been extended, LC or firm order need not be insisted upon initially for disbursement of PCFC. As and when the relative LC or firm order is received by the exporter, the particulars thereof should be noted in the registers. The LC or firm order need not be physically deposited with the Bank. However, statement of holding of the LCs / firm orders from the borrower covering the outstandings in PCFC should be obtained at monthly intervals. The branches need to introduce a suitable system to closely monitor the submission and meticulous scrutiny of statement of holding of LCs/ firm orders and also arrange for physical scrutiny of the LCs/firm orders, whenever considered necessary. In case of non-utilisation of PCFC drawn for export purposes, besides levying the prescribed penalties, the running account facilities for the exporter concerned should be withdrawn with immediate effect. The drawals already made under Rupee Running Account facility earlier should not be converted into PCFC advances. Under this facility, the method of first in - first out liquidation of PCFC is permitted. Hence a single PCFC account can be opened in the name of the exporter in such cases. While allowing repayments into the PCFC account, order to order application of repayments may not be necessary. But order to order monitoring through drawing power register is essential to ensure proper end use of funds and repayment of a particular PCFC advance within the stipulated period. The PCFC availed against a particular contract can be liquidated with the proceeds of the bill relating to another contract for which no packing credit has been availed of or by advance remittances in respect of export orders for which no PCFC drawal

has been granted. Before allowing this facility, it should be ensured that the exporter has not availed PCFC/EBR with any other bank in respect of the export bill in question. 5.5 Type of account: PCFC will be made available by way of cash credit account. Before any disbursal is made under PCFC, branches should ensure that the total of outstandings under EPC and the rupee equivalent of outstandings under PCFC (arrived at the fixed notional rate) is within the overall EPC limit of the exporter and the proposed disbursal falls within the limit. The drawing power register, therefore, should provide for columns to reflect PCFC and EPC outstandings and the total thereof, for monitoring the total outstandings at any point of time. Substitution of orders and commodities: Repayment of packing credit may be allowed with export documents relating to any other order covering the same or any other commodity exported by the exporter subject to the condition that there is no change in the terms and conditions as applicable for pre-shipment and post-shipment credit with reference to period, rate of interest, etc. The above relaxation is allowed subject to the following conditions : The facility of substitution of order / commodity is allowed when it is considered that the substitution is commercially necessary and unavoidable. The documents substituted should also pertain to shipment made by the exporting unit and not by its sister/associate/group concerns. while repayment of PCFC/Running Account facility is allowed from export proceeds of documents or advance remittances in respect of export orders against which such facility has not been availed, a declaration from the exporter may be obtained to the effect that he has not availed/will not avail PCFC from any bank against such orders/documents. The Bank may mark off the order representing the advance against PCFC drawals, if any left unmarked In case of liquidation of PCFC under Running Account facility by advance remittances, Branches should restrict such adjustments to PCFC drawals which are not outstanding for more than 360 days from the date of drawal.

5.6

5.7

Period of credit: PCFC will be available as in the case of rupee credit initially for a maximum period of 180 days from the date of

first disbursement. Any extension of the credit will be subject to the same terms and conditions as applicable for extension of Rupee Packing Credit and it will entail an interest cost of 2% plus the original spread (charged initially) above 6 months LIBOR prevailing at the time of extension for the extended period. If no export takes place even within 360 days, PCFC will be adjusted at the ruling T.T. selling rate for the currency concerned. Interest right from the date of disbursement till the date of payment, should be recovered at 2% over the interest rate applicable for the cash credit of the exporter and the interest earlier recovered at LIBOR related rates should be adjusted therefrom. Remittance of foreign exchange for repayment of principal with interest does not require RBI's prior approval in such cases. 5.8 5.9 Currency: PCFC can be availed in US dollar ($), pound sterling (), EURO and Japanese Yen for the time being. Rate of interest: This should be ascertained by the branches from their LHO/International Division, IBG, Corporate Centre. As of now, the rate of interest to be charged on the account is 1% (max), above 6 months LIBOR/ EUROLIBOR/EURIBOR rate as on the date of disbursement. 6 months LIBOR/EUROLIBOR/EURIBOR rate for $, EURO, , and Yen will be indicated by SBI, New York in its special page on the Reuter Monitor used for EEFC Deposit rates, on a daily basis. The branches not having Reuter Monitor facility should ascertain the rates from the nearest branches having Reuter Monitor facility.

The General Manager (CB) at LHO is permitted to quote finer rates on a highly selective basis with a view to retaining the business of valued clients and in such cases, the spread over 6 months LIBOR to be charged to the customer should be a minimum of 75 basis points. In case of CAG customers, similar concession can be permitted by the functionaries heading the concerned CAG branches. The overall income from various types of business placed by the customers should be substantial and their business relationship should be very valuable to merit the above said concession. Apart from the above, the rate of interest on PCFC can also be reduced, as advised by the International Division (Planning), International Banking Group, Corporate Centre, depending on the credit rating of the customer. 5.10 Transaction charges: Prescribed transaction charges should be levied for each PCFC disbursal. This as well as other charges are fixed by the International Division (Planning), International

Banking Group, Corporate Centre, from time to time. .Branches should ascertain these charges and recover the same. 5.11 Funding: Foreign Department will act as the nodal centre for raising/deploying the offshore and onshore funds for lending under PCFC. It will maintain PCFC loan Nostro A/cs with the Banks Nassau (US$ ), Frankfurt (Euro), London (), and Tokyo (Yen) for raising funds and routing the PCFC repayments at the macro level. Accounting: Designated Branches have to open a General Ledger Account styled "Cash Credit Foreign Currency Account" for routing all transactions under PCFC. The rupee balances in this account will be merged with cash credit balances in the Weekly Abstract under the head "Loans and Cash Credits". The accounting procedure to be followed will be as per the guidelines issued by the Foreign Department, Kolkata. Reporting of transactions to Foreign Department, Kolkata: The scheme as designed by RBI envisages application of interest rates linked to LIBOR rates prevailing at the time of PCFC disbursals. Hence, it is imperative to raise the foreign currency funds through the Banks foreign offices on the same day in respect of the disbursals made at the branches. The success and profitability of the scheme depends therefore largely on the prompt and accurate reporting of the disbursals and repayments to FD Calcutta by Fax/Telex before 3 P.M. on each day. In addition to the reporting of disbursals and repayments, maturity profile of PCFC disbursal, and repayment should be furnished in the relative format. Before effecting each disbursal under PCFC, the approximate date of shipment should be ascertained from the exporter in order to compile the maturity profile of PCFC. If any branch fails to report the days disbursements to FD for the purpose of funding, FD will charge the differential between the LIBOR linked rate and average rate for rupee funds for the period involved to the branch concerned. Repayment of PCFC: PCFC is to be necessarily liquidated out of the proceeds of the related Export Bill under Export Bill Rediscounting Scheme (EBR). However, the following relaxations have been permitted. Advance remittances / separate inward remittances received in respect of orders against which PCFC has been availed can be used to liquidate the PCFC. Care should be taken to see that the remittances received are not converted into Indian Rupees but the relative cover funds should be arranged to be transferred to the respective main nostro account (i.e. India Dollar Account in the case of US$ with SBI New York) and full particulars thereof should be reported to FD,

5.12

5.13

5.14

Kolkata under the heading Repayment of PCFC from sources other than EBR. This will enable FD to organise the repayment into its PCFC loan nostro account. The proceeds of export bills sent on collection or otherwise against which no PCFC/Packing Credit had been availed of, can also be applied to liquidate PCFC loan plus interest. The export bills tendered in respect of export orders against which PCFC has been availed cannot be sent on collection basis. The bills are to be necessarily discounted under EBR Scheme. Hence the availability of adequate non-credit bill discounting limit in the case of non-LC transactions and the possibility of negotiating the discrepant documents under indemnity etc. should be taken into account before grant of PCFC to the exporter. In case discrepant documents / non-LC bills are to be necessarily discounted while the non credit bill limit is fully utilised, it is suggested that the drawing power in EPC limit of the customer can be blocked to the extent of value of the documents discounted till the bill is realised. 5.15 Interest Application: Interest in foreign currency will be applied to the individual PCFC Account at quarterly intervals i.e. on the last working day of March, June, September and December of the year. Interest is to be calculated on daily products basis at the appropriate 6 months LIBOR plus 1%(or any other rate prescribed by the Bank) applicable for each PCFC drawal. The rupee equivalent of the interest amount will be debited to the exporter's cash credit account or current account at the ruling TT selling rate and the same will be credited to Branch Interest Account. ECGC Cover: ECGC cover is available in respect of PCFC Advances. It will, therefore, be in order for the branches to include the rupee outstandings in PCFC advances under the Whole Turnover Packing Credit Guarantee (WTPCG) @ every month. While arriving at the rupee equivalent of PCFC outstandings for this purpose, the T.T. selling (Card) rate prevalent on the last working day of the month should be taken into account. [@ -discontinued wef 1.07.2003]. Withholding Tax: In terms of a clarification given by the Banks Law Department, no withholding tax is payable, if interest on the foreign currency line is remitted to the Banks own foreign office. As it is intended to avail lines of credit only from the Banks foreign offices, withholding tax may not be paid by the exporters. Forward Contracts: Forward Contracts can be booked in respect of future PCFC drawals. Cross currency forward contracts can

5.16

5.17

5.18

also be availed in any of the permitted currencies against the invoiced currency in which PCFC is availed. 5.19 Cross Currency drawals: PCFC drawals in cross currencies may be permitted subject to the exporter bearing the risk in fluctuation in currency rates. Any shortfall in the foreign currency proceeds of the bill to be applied for liquidation of PCFC can be met by sale of the foreign currency (of PCFC) against Rupees. In order to cover the shortfall, margins as considered necessary (say 10% minimum) may be retained on the drawal at the PCFC disbursement stage itself. This may not be necessary when the exporter enters into a cross currency forward contract, for matching PCFC amount while availing cross currency PCFC. The minimum amount of drawal for cross currency PCFC should be US $250000 or equivalent. Reporting of transactions in Weekly Abstract, P-Report and RReturns Weekly Abstract: The balances in "Cash Credit (Foreign Currency)" Account in the General Ledger should be merged with the cash credit rupee balances in the weekly abstract. However, the outstandings under PCFC should be furnished promptly to the Assistant General Manager(C&IBP) at LHO by the designated branches as on the reporting Fridays of the month on the specified format. The designated branches have, therefore, to ascertain the dates of all reporting Fridays from the LHO concerned well in advance. P-Report: The disbursals of PCFC for purchase of domestic raw materials which involve conversion into Indian Rupees are purchase transactions and should be included in the total purchases for the purpose of P-Report. Again when the export bill is discounted under EBR to liquidate the underlying PCFC, any surplus portion which is converted into Indian Rupees for credit to the exporter's account should be treated as a purchase transaction and should be included in the total purchases for the purpose of P-Report. R-Returns: The purchase transactions as stated above will also be shown as such in the R-Returns. Other Provisions PCFC for Deemed Exports: PCFC can also be granted for deemed exports covering supplies to projects financed by multilateral /bilateral agencies/ funds. The PCFC granted for deemed exports should be liquidated by EBR within a maximum period of 30 days or up to the date of payment by project

5.20 a)

b)

c) 5.21

authorities whichever is earlier, subject to compliance with other conditions relating to deemed exports PCFC sharing between export order holder and manufacturer supplier: PCFC can be granted to a manufacturer supplier against the LC or export order received by the export order holder on the basis of the disclaimer from the export order holder through his banker. PCFC granted to the manufacturer can be repaid by transfer of foreign currency from the export order holder by availing of PCFC or discounting of bills under EBR. It should be ensured that there is no double financing involved in the transaction and the total period of packing credit is limited to the actual cycle of production of the exported goods. PCFC sharing between two EOU/EPZ Units: PCFC can also be made available to both the supplier EOU/EPZ unit and the receiver EOU/EPZ unit. PCFC for supplier EOU/EPZ unit will be for supply of raw material / components of goods which will be further processed and finally exported by receiver EOU/EPZ unit. The PCFC extended to supplier EOU/EPZ unit will have to be liquidated by receipt of foreign exchange from the receiver EOU/EPZ unit, for which purpose, the receiver EOU/EPZ unit can avail of PCFC. The stipulation regarding liquidation of PCFC by payment in foreign exchange will be met in such cases by transfer of foreign exchange from the banker of the receiver EOU/EPZ unit to the banker of supplier EOU/EPZ unit. Thus, there will not normally be any post-shipment credit in the transaction from the supplier EOU/EPZ units point of view. In all these cases, it has to be ensured that there is no double financing for the same transaction. The PCFC granted to receiver EOU/EPZ unit will be liquidated by discounting of export bills. Existing EPC outstandings of the exporters in Rupees cannot be converted into PCFC advances. In case the Exporter avails Suppliers credit in respect of his imports, he will be eligible for PCFC only for purchase of domestic inputs. The PCFC amounts will be taken into account for the purpose of compliance with normal credit discipline like total assessed limits etc. PCFC can be granted in respect of exports under ACU mechanism. Before granting PCFC, it should be made clear to the exporters that the LCs should not be restricted to other banks

and that the bills should be invariably discounted with the Bank under EBR scheme. Exporters availing PCFC at the Banks branches should not be allowed to book forward/cross currency forward contracts with any other bank in respect of the relative bills. Designated branches should not send any messages relating to debits/credits in the PCFC and EBR Nostro Loan accounts of FD, to the foreign offices concerned directly. The foreign offices will act only on the instructions of FD (nodal centre) and ignore the messages relating to PCFC and EBR transactions, received from the domestic offices. Exporters who have not availed PCFC / EPC and exporters who availed EPC can avail the EBR scheme. Exporters who availed PCFC have to necessarily avail EBR and can not avail Rupee post shipment finance for discounting the relative bills 6. ECGC Cover: The Export Credit Guarantee Corporation of India Ltd. (ECGC) provides support to both exporters and financing banks through export credit insurance. The policies issued by ECGC to exporters cover various commercial and political risks. ECGC provides guarantee to banks for pre-shipment as well as post-shipment export finance extended to exporters in India. The Bank has subscribed to the Whole Turnover Packing Credit Guarantee Scheme of ECGC. Export Credit Simplification of procedures On line approach to credit: The credit facilities sanctioned to exporters should be renewed annually. In case of delay in renewal, the sanctioned limit may be allowed to continue uninterrupted and urgent requirement of the exporters should be met on ad hoc basis. Therefore, export finance should not be withheld for reasons of delay in renewal or non-renewal of limits. Wherever warranted, ad hoc limits may be considered for sanction ensuring that renewal exercise is completed expeditiously. In case of export of seasonal commodities, agrobased products, etc. sanction may be accorded for peak/nonpeak credit facilities to exporters as per extant guidelines. In this connection, a Stand-by Line of Credit (SLC) for meeting genuine contingency needs of exporters may be sanctioned along with regular credit limits as a separate limit. For detailed instructions, please refer to Annexure- WC-2, of Chapter 7. 7.2 Handling of Export Documents: While handling export documents, submission of original sales contract/ confirmed order/proforma invoice countersigned by overseas buyer/indent

7. 7.1

from authorised agent of overseas buyer need not be insisted upon, since the goods have already been valued and cleared by the customs authorities except in the case of transactions with Letters of Credit where the terms of LC require submission of the sale contract/other alternative documents. 7.3 Fast Track Clearance of Export Credit (i) At special branches and branches having significant export business a facilitation mechanism for assisting export customers may be put in place for quick initial scrutiny of appraisal and for additional information/clarification. Towards this end, the Circle Management Committee may finalise the mechanism by designating a suitable official with adequate skills and experience taking into consideration the special features obtaining at each centre. (ii) The export credit proposals should be disposed of within the specified time limit as prescribed in paragraph 7. 5 of Chapter 5.