1. Definition. A pre-shipment credit or packing credit means any loan or advance granted to an exporter for financing the purchase, processing, manufacturing or packing of goods. Sometimes pre-shipment finance may be granted against export incentives like duty drawback.
2. Eligibility. The pre-shipment credit is granted to bonafide exporter, on the strength of letters of credit established by banks of standing abroad in favor of exporter or a firm order. The bank should ensure that the letter of credit or the firm order is lodged with it. In case the exporter is not able to lodge the letter of credit or firm order immediately the packing credit may be granted on the strength of cables, letters, etc., exchanged between the exporter and importer. in such cases, it should be ensured that the letter of credit or the firm order is lodged by the exporter after a reasonable period of time.
3. Type of facility. Packing credit is required to be disbursed only in the form of a loan. Individual loan accounts are to be maintained for each packing credit. Exception is made in the case of exporters with good trade record for whom running accounts in the form of cash credit accounts are allowed. The exporter can borrow on many contracts through this cash credit account.
The amount advanced should be disbursed depending upon the requirements of the exporter. Thus, it may be disbursed in stages as per the needs of exporter or in lump-sum. The packing credit may be a clean advance or it may be secured by hypothecation or pledge of goods purchased. It is subject to supervision and follow-up by the banks as any other bank advance.
4. Period of loan and rate of interest. The period for which a packing credit may be granted depends upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing and shipping the relative goods. But as a general guideline, it should not exceed 180 days. Interest chargeable for this period is 13% per annum. If the exporter requires extension of period of advance, the bank may grant it taking into account the circumstances of the case. Interest is chargeable at 15% p.a. for periods beyond 180 days and up to 270 days.
5. Quantum of finance. The amount of advance should not exceed the domestic cost of the export product and also its FOB value. But in some cases export may be at prices less than the cost price in which case the difference is available in the form of duty drawback from the Government. There the advance should not exceed the FOB value plus; incentives available, subject to the maximum of domestic cost
6. Repayment . The packing credit amount should be repaid out of the proceeds of foreign hills of exchange drawn under the export contract. It may also be paid out of export incentives like duty drawback. If the proposed export does not take place and the banker is satisfied about the reasons, the account may be adjusted out of the local funds. But interest at domestic rate should be charged on the account from the date of advance.