Why is Rupee Packing Credit Loan better than Pre-shipment Credit in Foreign Currency

Apparently PCFC is advantageous as compared to the rupee packing credit due to interest differential and avoidance of conversion cost. But this advantage will accrue to the exporter only so long as the gain thus made is not offset by the premium he loses on dollar for the bill under the export contract.

Where PCFC is availed, the export bill tendered will be discounted under the export bill discounting scheme and no conversion into rupee is involved. In case the exporter had availed rupee packing credit for the export bill tendered, the bank will apply the bill buying rate. The bill buying rate applied will have built-in premium for the transit and usance period which is not available to the exporter when he avails PCFC.

The actual financial cost to the exporter under PCFC remains the same as the interest paid by him on PCFC. If he avails rupee packing credit, the total financial cost would be the interest paid, plus conversion cost (difference between buying and selling rate), less the premium on forward dollar. If the premium gained is more than offset by the conversion cost and interest difference between rupee credit and PCFC, rupee credit would be preferable to PCFC.

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