CHAPTER 4 PRE-SHIPMENT FINANCE

Transcription

1 CHAPTER 4 PRE-SHIPMENT FINANCE

2 CHAPTER 4 PRE-SHIPMENT FINANCE INDEX Para No TOPIC Page No 4 Introduction Packing Credit (PC) : Eligibility Pre-shipment credit to Diamond Exporters Conflict 5 Diamonds & Sierra Leone Rough Diamonds Kimberley Process (KP) Certificate Purpose Rupee Pre-shipment Credit to specific sectors / 7 segments Rupee Export Packing Credit to manufacturer 7 suppliers for exports routed through STC / MMTC / Other Export Houses, Agencies etc Rupee Export Packing Credit to Sub-Suppliers Rupee Pre-shipment Credit to Construction Contractors Export of Services Pre-shipment Credit to Floriculture, Grapes and 11 Other Agro-based Products Export Credit to Processors/Exporters Agri. Export 12 Zones 4 3 Period Extension of Period Rates of Interest on Packing Credit Rate of Interest on Advance Against Govt. Receivables Sanction of Packing Credit Limits Quantum of Packing Credit Finance Application and Preliminary Formalities 20 2

3 4 8 1 Documentation Exporters Caution List/Specific Approval List Insurance Packing Credit Contract /LC wise Loan (Rupee) A/c Running Packing Credit (Rupee) Account Operational Guidelines for Packing Credit Rupee Account Supervision of the Advance Repayment of Packing Credit Crediting 100% of Export Proceeds to Running 29 Packing Credit A/c Exceptions Repayment through Granting of AFDBC Substitution of Export Contracts Overdue Packing Credit Advances Requirement of ECGC 31 Annex No Annexure 1 Undertaking from Diamond Clients 32 2 Application for Packing Credit Advance 33 3 Letter calling for original LC/ Contracts 36 4 Extension of Validity of LC/Contract 37 5 Statement for overdue PC 38 3

4 4. INTRODUCTION Export finance may be broadly classified as 'Pre-Shipment' and 'Post-Shipment' finance depending upon the stage at which the finance is extended. Finance extended to the exporters, prior to shipment of goods is termed as 'Pre-Shipment Finance' while that extended after shipment of goods is termed as 'Post-Shipment Finance'. 'Pre-shipment' means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment / working capital expenses towards rendering of services, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has specifically been waived PACKING CREDIT (PC) : ELIGIBILITY Packing Credit is normally available to an exporter who fulfils the following requirements: Exporter who is holding the Importer Exporter Code (IEC) Number allotted by DGFT. Exporter who is holding Registration Cum Membership Certificate (RCMC) wherever required (as in the case of quota items) Exporter who has not been CAUTION LISTED by RBI. Exporter who is not on the Specific Approval List (SAL) of ECGC. Exporter who has an export commitment/order and has capacity to fulfill the same. Commodity to be exported should be freely exportable as per the Foreign Trade policy. If the commodity comes under restricted list, the relevant export licence should be available with the exporter. If commodity is subjected to floor price restrictions / quota, relevant FTP guidelines should be complied with. Import of rough/polished diamonds should not be from conflict countries (conflict diamonds- Diamonds originated from Siera Leone, Angola and 4

5 Cango, Liberia as per UN Resolution No. 1173, 1176 and 1343 dated and ). Declaration to that effect should be obtained as per Annexure 4(1) Importing country should be the one on which no trade ban is in force. Methods of payment, export related payments and all other terms should conform to FEMA Guidelines Pre-shipment credit to Diamond Exporters Conflict diamonds & Sierra Leone Rough Diamonds: Conflict Diamonds : Diamonds that originate from areas controlled by forces or factions opposed to legitimate and internationally recognized governments, and are used to fund military action in opposition to those governments, or in contravention of the decisions of the Security Council. Trading in conflict diamonds has been banned by UN Resolution Nos and 1176 as the conflict diamonds play a large role in funding the rebels in the civil torn areas of Sierra Leone, Angola and Congo. There is also a prohibition on the direct / indirect import of all rough diamonds from Sierra Leone and Liberia in terms of the UN Resolution nos. 1306(2000) and 1343(2001) respectively. In view of this, the banks should obtain an undertaking in the format as per Annexure 4(1) from the clients who have been extended credit for doing any business relating to diamonds. Any violation of these UN Regulations as and when noticed may be reported to RBI, IECD Kimberley Process (KP) certificate With a view to curbing the entry of Conflict Diamonds in the mainstream diamond trade, International communities and UN decided to address the issue. As a result, Kimberley Process Secretariat has been established and it is decided to adopt a Certification System. India is one of the founding members of Kimberley Process Certification Scheme (KPCS). The Scheme is administered through Department of Commerce, Ministry of Commerce and Industry, Government of India. Department of Commerce, vide its letter No.12/13/2000-EP(G&J) dated 13/11/2002, have designated Gem and 5

6 Jewellery Export Promotion Council (GJEPC) as the Import and Export Authority within the meaning of Section IV(b) of the Scheme. No import or export of rough diamonds shall be permitted unless the shipment is accompanied by Kimberley Process Certificate required under the procedure specified by the GJEPC. Central Board of Excise and Customs (CBEC), Ministry of Finance, Government of India, vide their Circular No.55/2003-Cus dated 23 June 2003 has issued detailed instructions to Customs field formation about the procedure to be adopted for import and export of rough diamonds. Under Special Economic Zone (SEZ) Rules, 2006 of Government of India, Development Commissioners have been delegated powers to issue Kimberley Process Certificate for units located in respective SEZs. GJEPC has simplified the process for issue and endorsement of KP Certificates with the use of online software. Branches are therefore advised to note that before extending advance for imported diamonds or even handling collection bills, Import of rough diamonds are accompanied by Kimberley Process (KP) Certificate. 4.2 PURPOSE Packing Credit is an advance granted to an exporter or a sub-supplier for financing the procurement of raw materials, processing, manufacturing, packing, transporting, warehousing and shipping of goods meant for export / working capital expenses towards rendering of services. Packing Credit is generally granted to an exporter who has an export order / LC in his own name / LCs transferred in his name and will actually export the goods. However, Packing Credit can also be granted to supporting manufacturers or suppliers of goods who do not have export orders or LCs in their own names but are exporting through merchant exporters or export houses. The advance is granted against pledge or hypothecation of stocks to be processed / produced to execute the export order. In exceptional circumstances, where there is a need, a portion of the Packing Credit can be released as a clean advance for the purpose of procuring stocks based on the export order/lc, under Branch Manager's sanction. An undertaking from the borrower that the advance will be backed by security of stocks 6

7 within a period not exceeding 15 days should be taken in such cases. Branches should closely monitor such clean facilities and ensure that the advance is covered by adequate stocks within 15 days. In exceptional cases, taking into account the peculiarity of trade, industry practice, this period of 15 days can be extended to a reasonable extent with the prior approval of the branch head Rupee Pre-shipment Credit to specific sectors / segments Rupee Export Packing Credit to manufacturer suppliers for exports routed Through STC/MMTC/Other Export Houses, Agencies etc. (i) Banks may grant export packing credit to manufacturer suppliers who do not have export orders/letters of credit in their own name and goods are exported through the State Trading Corporation/Minerals and Metal Trading Corporation or other export houses, agencies etc. (ii) Such advances will be eligible for refinance, provided the following requirements are complied with apart from the usual stipulations: (a) Banks should obtain from the export house a letter setting out the details of the export order and the portion thereof to be executed by the supplier and also certifying that the export house has not obtained and will not ask for packing credit in respect of such portion of the order as is to be executed by the supplier. (b) Banks should, after mutual consultations and taking into account the export requirements of the two parties, apportion between the two i.e. the Export House and the Supplier, the period of packing credit for which the concessionary rate of interest is to be charged. The concessionary rates of interest on the pre-shipment credit will be available up to the stipulated periods in respect of the export house/agency and the supplier put together. (c) The export house should open inland L/Cs in favour of the supplier giving relevant particulars of the export LCs or orders and the outstandings in the packing credit account should be extinguished by negotiation of bills under such inland LCs. If it is inconvenient for the export house to open such inland LCs in favour of the supplier, the latter should draw bills on the export house in respect of the goods supplied 7

8 for export and adjust packing credit advances from the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied by bills of lading or other export documents, the bank 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. (d) Banks should obtain an undertaking from the supplier that the advance payment, if any, received from the export house against the export order would be re-credited to the packing credit account Rupee Export Packing Credit to Sub-Suppliers Packing credit can be shared between an Export Order Holder (EOH) and sub-supplier of raw materials, components etc. of the exported goods as in the case of EOH and manufacturer suppliers, subject to the following: (a) Running Account facility is not contemplated under the scheme. The scheme will cover the LC or export order received in favour of Export Houses/Trading Houses/Star Trading Houses etc. or manufacturer exporters only. The scheme should be made available to the exporters with good track record. (b) Bankers to an EOH will open an inland LC specifying the goods to be supplied by the sub-supplier to the EOH against the export order or LC received by him as a part of the export transaction. On the basis of such a LC, the sub-supplier's 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 the goods, the LC opening bank will pay to the sub-supplier's banker against the inland documents received on the basis of inland LC. Such payments will thereafter become the EPC of the EOH. (c) 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 or 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 8

9 within normal cycle of production required for the exported goods. Normally, 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. (d) The EOH will be responsible for exporting the goods as per export order or Overseas LC and any delay in the process will subject him to the penal provisions issued from time to time. Once the sub-supplier makes available the goods as per inland LC terms to the EOH, his obligation of performance under the scheme will be treated as complied with and the penal provisions will not be applicable to him for delay by EOH, if any. (e) The scheme is an additional window besides the existing system of sharing of packing credit between EOH and manufacturer in respect of exported goods as detailed in paragraph above. The scheme will cover only the first stage of production cycle. For example, a manufacturer exporter will be allowed to open domestic LC in favour of his immediate suppliers of components etc. that are required for manufacture of exportable goods. The scheme will not be extended to cover 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. (f) EOUs/EPZ/SEZ units supplying goods to another EOU/EPZ/SEZ unit for export purposes are also eligible for rupee pre-shipment export credit under this scheme. However, the supplier EOU/EPZ/SEZ unit will not be eligible for any post-shipment facility as the scheme does not cover sale of goods on credit terms. (g) The scheme does not envisage any change in the total quantum of advance or period. Accordingly, 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 upto the date of liquidation of packing credit by shipment of goods by EOH and will be eligible for refinance from RBI by the respective banks for the appropriate periods. It has to be ensured that no double financing of the same leg of 9

10 the transaction is involved. (h) Banks may approach the ECGC for availing suitable cover in respect of such advances. (i) The scheme does not envisage extending credit by a sub-supplier to the EOH/manufacturer and thus, the payment to sub-suppliers has to be made against submission of documents by LC opening bank treating the payment as EPC of the EOH Rupee Pre-shipment Credit to Construction Contractors (a) The packing credit advances to the construction contractors to meet their initial working capital requirements for execution of contracts abroad may be made on the basis of a firm contract secured from abroad, in a separate account, on an undertaking obtained from them that the finance is required by them for incurring preliminary expenses in connection with the execution of the contract e.g., for transporting the necessary technical staff and purchase of consumable articles for the purpose of executing the contract abroad, etc. (b) The advances should be adjusted within 365 days of the date of advance by negotiation of bills relating to the contract or by remittances received from abroad in respect of the contract executed abroad. To the extent the outstandings in the account are not adjusted in the stipulated manner, banks may charge normal rate of interest on such advance. (c) The exporters undertaking project export contracts including export of services may comply with the guidelines/instructions issued by Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai from time to time Export of Services Pre-shipment and post-shipment finance may be provided to exporters of all the 161 tradable services covered under the General Agreement on Trade in Services (GATS) where payment for such services is received in free foreign exchange as stated at Chapter 3 of the Foreign Trade Policy All provisions of this chapter 3 shall apply to export of services as they apply to export of goods unless otherwise specified. A list of services is given in Appendix 10 of HBPv1. The financing bank should ensure that there is no double financing and the export credit is liquidated with remittances from 10

11 abroad. Banks may take into account the track record of the exporter/overseas counter party while sanctioning the export credit. The statement of export receivables from such service providers may be tallied with the statement of payables received from the overseas party. In view of the large number of categories of service exports with varied nature of business as well as in the environment of progressive deregulation where the matters with regard to micro management are left to be decided by the individual financing banks, the banks may formulate their own parameters to finance the service exporters. Exporters of services qualify for working capital export credit (pre and post shipment) for consumables, wages, supplies etc. Banks may ensure that - The proposal is a genuine case of export of services. The item of service export is covered under Appendix 10 of HBPv1. The exporter is registered with the Electronic and software EPC or Services EPC or with Federation of Indian Export Organisations, as applicable. There is an Export Contract for the export of the service. There is a time lag between the outlay of working capital expense and actual receipt of payment from the service consumer or his principal abroad. There is a valid Working Capital gap i.e. service is provided first while the payment is received some time after an invoice is raised. Banks should ensure that there is no double financing/excess financing. The export credit granted does not exceed the foreign exchange earned less the margins if any required, advance payment/credit received. Invoices are raised. Inward remittance is received in Foreign Exchange. Company will raise the invoice as per the contract. When payment is received from overseas party, the service exporter would utilize the funds to repay the export credit availed of from the bank Pre-shipment Credit to Floriculture, Grapes and Other Agro-based Products i. In the case of floriculture, pre-shipment credit is allowed to be extended by banks for purchase of cut-flowers etc. and all post-harvest expenses incurred for 11

12 ii. iii. making shipment. However, with a view to promoting export of floriculture, grapes and other agrobased products, banks are allowed to extend concessional credit for working capital purposes in respect of export-related activities of all agro-based products including purchase of fertilizers, pesticides and other inputs for growing of flowers, grapes etc., provided banks are in a position to clearly identify such activities as export-related and satisfy themselves of the export potential thereof, and that the activities are not covered by direct/indirect finance schemes of NABARD or any other agency, subject to the normal terms & conditions relating to packing credit such as period, quantum, liquidation etc. Export credit should not be extended for investments, such as, import of foreign technology, equipment, land development etc. or any other item which cannot be regarded as working capital Export Credit to Processors/Exporters Agri.-Export Zones i. Government of India has set up Agri.-Export Zones in the country to promote Agri. Exports. Agri.- Export Oriented Units (processing) are set up in Agri.- Export zones as well as outside the zones and to promote such units, production and processing are to be integrated. The producer has to enter into contract farming with farmers and has to ensure supply of quality seeds, pesticides, micronutrients and other material to the group of farmers from whom the exporter would be purchasing the products as raw material for production of the final products for export. The Government, therefore, suggested that such export processing units may be provided packing credit under the extant guidelines for the purpose of procuring and supplying inputs to the farmers so that quality inputs are available to them which in turn will ensure that only good quality crops are raised. The exporters will be able to purchase / import such inputs in bulk, which will have the advantages of economies of scale. ii. Banks may treat the inputs supplied to farmers by exporters as raw material for export and consider sanctioning the lines of credit / export credit to processors/exporters to cover the cost of such inputs required by farmers to cultivate such crops to promote export of agri. products. The process or units would be able to effect bulk purchases of the inputs and supply the same to the farmers as per a pre-determined arrangement. 12

13 iii. iv. Banks have to ensure that the exporters have made the required arrangements with the farmers and overseas buyers in respect of crops to be purchased and products to be exported respectively. The financing banks will also appraise the projects in agri. export zones and ensure that the tie-up arrangements are feasible and projects would take off within a reasonable period of time. They are also to monitor the end-use of funds, viz. distribution of the inputs by the exporters to the farmers for raising the crops as per arrangements made by the exporter/main processor units. v. They have to further ensure that the final products are exported by the processors/exporters as per the terms and conditions of the sanction in order to liquidate the pre-shipment credit as per extant instructions PERIOD: RBI has permitted the banks to extend packing credit advance depending upon the circumstances of the individual case, time required for processing, manufacturing and shipping the relative goods. Field Functionaries are authorised to decide the period of advances as under : Packing Credit can be extended to merchant/manufacturing exporters for the period of his operating cycle subject to maximum of 180 days. In the case of merchant / manufacturer exporter having several export orders for different commodities with different shipment periods, different operating cycle, the branch head is authorised to decide the period of advance against each export order subject to outer limit of 180 days. The sanctioning authority in the rank of AGM and above at the Controlling Office can permit up to 270 days ab-initio in the case of commodities with production cycle beyond 180 days. If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for prescribed rate of interest for export credit to the exporter ab initio. RBI would provide refinance only for a period not exceeding 180 days as per instructions issued by RBI (MPD). 13

14 Where the disbursement of Packing Credit against a particular contract /LC is done in stages, the total period is to be computed from the date of first drawal EXTENSION OF PERIOD Extension of time within 180 days can be approved by the Head of the branch, provided underlying order / LC is valid and shipment is likely to take place within the extended time. The branch has to seek approval of the Regional Office for extension of time in cases where the exporter is unable to ship the goods within 180 days due to reasons beyond his control, such as power shortage, transport bottlenecks, shipping problems etc. The Regional Office may permit two extensions of further 90 days each i.e. upto aggregate of 360 days, provided the underlying export contract/lc is valid and the reasons given are genuine or undertakes to submit valid order/lc within stipulated period to be decided by appropriate authority However in cases where exporter is not in a position to submit export orders / LCs but seeks extension of period for repayment from local sources, the request can be considered by respective competent authorities on the merits of individual cases. Extension of the period beyond 360 days requires reference to ECGC in the prescribed format with the concurrence of the Regional Office for prior approval of the Corporation. The branches should ensure that the exporter's application for extension of time together with their recommendation reaches the concerned Regional Office before the expiry of the initially permitted period. The Regional Offices should satisfy themselves that the extension sought for is on account of circumstances beyond the control of the exporter and the need for longer duration of credit is genuine based on the developments leading to delay. In order to enable the Regional Offices to consider the requests expeditiously branches are required to furnish the following information: 14

15 i. Date of advance. ii. Length of production cycle of the commodity. iii. The Stock inspection report based on the latest stock statement submitted by exporters. iv. The specific recommendations of the branch on the exporter's request commenting on its genuineness and the need for granting extension. v. Expected date of shipment. vi. Copy of exporter's request for extension of the Packing Credit period. vii. In case of Packing Credit covering deoiled / defatted cakes and deemed exports, confirmation that the stipulated terms and conditions have been complied with. viii. In case of substitution of contract, confirmation that stipulated terms and conditions are complied with. ix. If the export orders have expired for shipment undertaking to be obtained from exporter to submit valid orders within 30 days. If the exporter is not in position to submit export order/lc but seeks extension of period for repayment from local resources, the undertaking of the exporter to that effect and along with definite programme for repayment of dues within the proposed extended period with branch recommendations. However the finance will not be available at concessional rates of interest. x. Confirmation from the Overseas buyer extending the date of shipment and agreeing to make the payment on revised dates RATES OF INTEREST ON PACKING CREDIT (IN RUPEES) i. The Base Rate System is applicable with effect from July 1, Accordingly, interest rates applicable for all tenors of rupee export credit advances sanctioned on or after July 01, 2010 are at or above Base Rate. ii. If pre-shipment advances are not liquidated from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days from the date of advance, or as indicated at para 4.15 the advances will cease to qualify for prescribed rate of interest for export credit ab initio. iii. In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a 15

16 iv. period of 360 days from the date of advance, exporter would be eligible for concessional credit only upto the sanctioned period. For the balance period, interest rate prescribed for 'ECNOS' at the pre-shipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter. cases where exports do not take place within 360 days from the date of preshipment advance, such credits will be termed as 'ECNOS' and banks may charge interest rate prescribed for 'ECNOS' pre-shipment from the very first day of the advance. v. Where partial domestic sale is involved However, in respect of export of agro-based products like tobacco, pepper, cardamom, cashew nuts etc., the exporter has necessarily to purchase a somewhat larger quantity of the raw agricultural produce and grade it into exportable and non exportable varieties and only the former is exported. The non-exportable balance is necessarily sold domestically. For the packing credit covering such non-exportable portion, commercial rate of interest applicable to the domestic advance from the date of advance of packing credit and that portion of the packing credit would not be eligible for any refinance from RBI. ECNOS ECNOS means Export Credit Not Otherwise Specified in the Interest Rate structure for which banks are free to decide the rate of interest keeping in view the Base Rate / BPLR guidelines. Banks should not charge penal interest in respect of ECNOS. vi. If export does not take place within 360 days, branches are to charge the rate applicable to 'EXPORT CREDIT NOT OTHERWISE SPECIFIED' from the first day of the advance. The above rate of interest will apply even if exports actually take place after 360 days. vii. Similarly, if no export takes place and if advance is recovered out of rupee funds, the branches are to charge from the first day of advance interest applicable to Packing Credit adjusted out of rupee funds, together with commission in lien of 0.125% on the Packing Credit advance so adjusted. 16

17 viii. If export takes place and the exporter does not wish to avail post shipment credit for adjustment of pre-shipment advance and requests for liquidation of the same by debiting his current account or EEFC a/c, his request can be acceded to and export documents can be handled on collection basis. No penal interest to be charged for such adjustments. ix. Interest is to be debited monthly and recovered from the CD/CC a/c of the exporter as ECGC does not extend its guarantee cover to such interest amounts. x. In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a period of 360 days from the date of advance, exporter would be eligible for concessional credit only upto the sanctioned period. For the balance period, interest rate prescribed for ECNOS at pre-shipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter RATE OF INTEREST ON ADVANCE AGAINST GOVT. RECEIVABLES EXPORT CREDIT Normal Advance against Incentives receivable from Govt. covered by ECGC Guarantee (up to 90 days) *Base rate + 1.5% Against undrawn balance (up to 90 days) *Base rate + 1.5% Against Retention Money (for suppliers portion only) payable within 1 year from the date of shipment (up to 90 days) *Base rate + 1.5% * Applicable current rate subject to change 4.6. SANCTION OF PACKING CREDIT LIMITS i. Packing Credit advances are to be granted as per RBI guidelines and the credit 17

18 Norms / policies of the bank and only to bonafide exporters of good standing, capable of executing the export obligation as per the schedule agreed ii. The applicant's export performance during the last 2 or 3 years or his capacity to execute the export contract is to be taken into consideration while granting the advance. A study of the customer's requirements vis-a-vis the procurement, production capacity and shipment schedule is to be made and need based limits are to be fixed. iii. Parties sanctioned Packing Credit limits should comply with the requirements of FEMA Guidelines, FT Policy and ECGC. iv. Factors like restricted cover countries with externalization problems and other country specific risks are to be taken into consideration by the sanctioning authority. v. Packing Credit advances are adjusted by tendering export documents for purchase / negotiation / discounting. In such an event, pre-shipment credit limit/s are to be considered along with appropriate and adequate post-shipment limits. In the case of merchant exporters or exporters who wish to avail of advance licence, necessary non-fund based facilities like import LC / domestic LC / bank guarantee etc. are also to be considered simultaneously, so that the entire package of limits required for export operations is made available to the exporter. 4.7 QUANTUM OF PACKING CREDIT FINANCE Normally the Packing Credit granted to an exporter should not exceed the FOB value or domestic market value of the goods, whichever is lower. However, there are two exceptions to this rule. The Packing Credit advance can be made available to the extent of the domestic cost of production of the goods even if such value is higher than the FOB value of the goods, when such difference in value is realisable from the Govt. of India under specific schemes, like Duty Drawback etc. The branch has to ensure that the amount of pre-shipment advance given in excess of the FOB value is covered by a specific Export Production Finance Guarantee of ECGC. In such cases, excess advance should be liquidated from Government receivables. 18

19 RBI has permitted to extend packing credit in excess of export value : a) Whereby the product can be exported Where the exporter is unable to tender export bills of equivalent value for liquidating the packing credit due to the shortfall on account of wastage involved in the processing of agro products like raw cashew nuts, etc., branches may allow exporters, inter-alia, to extinguish the excess packing credit by export bills drawn in respect of by-product like cashew shell oil, etc. b) Where partial domestic sale is involved In respect of export of agro-based products like tobacco, pepper, cardamom, cashew nuts etc. the exporter has necessarily to purchase a somewhat larger quantity of the raw agricultural produce and grade it into exportable and non-exportable varieties and only the former is exported. The non-exportable balance is necessarily sold domestically. For the packing credit covering such non-exportable portion, banks are required to charge commercial rate of interest applicable to the domestic advance from the date of advance of packing credit till liquidation and that portion of packing credit would not be eligible for any refinance from RBI. c) Export of deoiled/defatted cakes Banks are permitted to grant packing credit advance to exporters of HPS ground nut and deoiled/defatted cakes to the extent of the value of raw materials required even through the value thereof exceeds the value of the export order. To be eligible for concessional rate of interest, the advance in excess of the export order is required to be adjusted either out of own funds or by sale of residual by-product of within a period not exceeding 30 days from the date of advance. d) The quantum of eligible Packing Credit is to be calculated on the FOB value or domestic market value less margin specified whichever is less. While fixing margin following factors are to be borne in mind: i. To ensure exporter's stake in business. ii. To take care of erosion in value of goods charged to the Bank 19

20 iii. To ensure that bank finance is not extended to cover Exporter s profit margin. Where the value of the export contract is given on CIF basis, the FOB value is to be arrived at by reducing reasonable insurance and freight cost as given below: CIF value of contract Less Insurance (1 % to 2%)* freight (10% transported by sea and 25% for air freight)* = FOB value of contract Less Margin stipulated / EEFC component,whichever is higher = Amount eligible for advance (drawing power) Note: lower freight levels may be accepted, subject to party producing documentary evidence 4.8. APPLICATION AND PRELIMINARY FORMALITIES An exporter's application for Packing Credit in the bank's standard format (Annexure No.4(2)) should be accompanied by the following documents :- Confirmed export order/contract/proforma invoice or L/C established by the following categories of Banks : i. Overseas Banks with an international rating up to 1000 (PRIMEBANKS) as circulated by IBD from time to time. ii. Banks wherein the stake of respective Governments is 51 % and above. iii. All our correspondent Banks except Banks located in restricted cover countries. If the LC received is not falling in the above categories, then prior approval from IBD is to be obtained. Branches should forward copy of the LC received along with their recommendations. Approval from IBD will be considered based on financials of the overseas Bank and their standing. 20

21 Applicant's undertaking to utilise the advance for the specific purpose of procuring / manufacturing / shipping etc. the goods meant for export only and in keeping with the terms of relative confirmed export order / letter of Credit. At times exporters may conclude contracts by exchange of cable/ telex/fax messages/ and regular order /LC may follow later. In such cases the Packing Credit Advance may be granted against preliminary information (such as cable/telex/ fax/ ) supported by an undertaking to produce the confirmed order or Letter of Credit within a reasonable time. The preliminary advice must, contain the following information: i) Name of the buyer, ii) Particulars of goods to be exported, iii) Quantity, Unit price and value of order, iv) Date of shipment, validity of contract, v) Terms of sales and payment. Branches can also rely on confirmed orders received through fax/other electronic media. The preliminary advice must be endorsed with the date and amount of Packing Credit disbursed (to prevent double financing) under the dealing officer's signature and stamp. The branch should diarise and follow-up with the borrower for submission of the Letter of Credit / confirmed contract from date he undertakes to submit the same (Annexure No.4(3)). The original Letter of Credit/confirmed contract is also to be endorsed in the same manner, when produced to the branch. The original LC/order should not be parted with, as far as possible, except for genuine reasons. A written request should be obtained from the customer for the receipt of the original Letter of Credit/export order and his acknowledgement taken on the letter for having received the original. A photo copy of the Letter of Credit / order evidencing the endorsement of the Bank should also be retained before parting with the original and the copy marked' original verified'. 21

22 Exporters should have IEC No. allotted by DGFT and a Photocopy of letter of allotment of IEC Number is to be held on record, as a one time measure, after verifying with the originals. The PC application should be signed by an authorised person, whose signature should be verified by the branch officials. The branch should ensure that all stipulations of the sanction advice are complied with including execution of necessary security documents. Since Packing Credit advance must be liquidated by post-shipment advance, branch must, before disbursing Packing Credit, minutely examine the Letter of Credit / Contract and ensure that it contains no onerous clauses and that the Bank will be able to negotiate/discount/purchase the export documents, when tendered. Validity of the Letter of Credit/contract must be verified to ensure that it has not expired. The terms of the contract/letter of Credit should be in conformity with the terms and conditions of the sanctioned limit i.e. commodity, usance etc. In case of advances to be granted other than against a LC, a satisfactory credit report on the overseas buyer must be obtained for orders exceeding USD 25,000/ or its equivalent. Authority to consider waiver/post-facto obtaining of credit report for orders exceeding USD 25,000/ is delegated to DGM/ AGM heading ELB and DGM/ AGM/RM heading controlling offices in the case of other branches. Such requests are to be considered taking into account the standing of the customer, past experience with overseas buyer, specific country risks, if any. If ECGC has approved buyer-wise limit, there is no need for separate credit report, provided value of the order is within the approved limit. In case the commodity to be exported attract the provisions of export quota or are under special export licence, branch has to generally obtain export quota certificate/ export licence. 22

23 If the country to which the goods are being exported is in the 'Restricted Cover List' of ECGC, prior approval of ECGC should be obtained, before disbursing preshipment advance, for the post-shipment stage which would eventually follow. For detailed guidelines please refer to Chapter 6 on Whole Turnover Packing Credit Guarantee. If similarly the country is placed in Restricted Cover for which revolving limits are approved by ECGC, branches should insist on submission on original approval by ECGC and retain a copy of the same for branch records. Further, in both the cases if exporter has not obtained approval from ECGC, the branch should obtain the same from ECGC before granting advance. Disbursal of PC advance can be authorised by the Officer in charge of Forex Dept., in smaller branches and Senior Manager (Exports) in larger branches, provided out standings are within limit, there are no over dues and all sanction terms are duly complied with. However, at the end of the day, Head of the Branch or AGM / CM in charge of Forex dept, should ratify the action by counter signing the PC application cum process note (Annexure No.4(2)). PC applications not conforming to the above. should be placed before the Head of the Branch or AGM / CM in charge of Forex dept for sanction before disbursement Documentation Normally Demand Promissory Note (DP Note), Letter of Continuity and Packing Credit Agreement documents are to be obtained. All other customer specific terms and conditions laid down in the sanction advice such as personal guarantees, collateral securities, registration of charges, letter of negative lien and the free access in case of storage in third party godown etc., are to be complied with before release of limits EXPORTERS CAUTION LIST / SPECIFIC APPROVAL LIST The exporter should not be on RBI caution list and specific approval list (SAL) of ECGC INSURANCE Stocks charged to the Bank as security should be covered by insurance for 110% value against all necessary risks. The insurance policy should either be in the name of the 23

24 Bank a/c of customer or in the name of customer with 'Bank clause'. Details are to be noted in the Insurance Register. Original policy should be held by the branch PACKING CREDIT CONTRACT / LC WISE LOAN (RUPEE) A/C The Packing Credit loan is normally given contract-wise / LC-wise, where a separate a/c is maintained for each contract / LC. The formalities, such as application and other conditions as stated in para No will have to be complied with. When disbursement is made in stages depending upon the need of the exporter, a schedule of disbursement may be called for before granting the advance. Exporter should submit details of payments to his suppliers, order-wise / LC-wise. The relative export order or Letter of Credit in original against which the advance is granted should invariably be endorsed on the reverse giving reference No., under which the advance is granted, amount of advance etc. and should be stamped and initialed by the officer. Necessary entries should be passed in the PC account of the customer. The details of the advance viz. contract/order or Letter of Credit, date of advance, amount of advance, expected date of shipment etc. should also be recorded in the Contract-wise Register. Due date of shipment is to be noted in the Due Date Diary for follow up purposes. All disbursements in the Packing Credit are to be routed through Packing Credit Disbursal Account opened in the name of the exporter for the purpose of monitoring and ensuring end use of Packing Credit Advance. Borrower should be advised to issue cheques from PC Disbursal account to his suppliers etc. At the end of the day the PC Disbursal account should either be in credit balance or zero balance, and it should never be in debit balance. As far as possible amounts should be directly paid to suppliers of raw materials, services etc., if trade practices call for cash payments to suppliers of raw materials etc, PC advance can be transferred to the operative account of the customer like CD/CC a/cs. and disbursals there from are to be supervised to ensure proper end use. Physical verification of stocks and scrutiny of 24

25 exporter's books of accounts is to be conducted at periodic intervals and reports to be held in file RUNNING PACKING CREDIT (RUPEE) ACCOUNT Running Packing Credit a/c may be extended to established exporters with a good export track record and whose dealings with the branch have been satisfactory, provided the need for such facility is established by the exporter to the satisfaction of the branch. Running Packing Credit can be also extended to EOU/Units in FTZ/SEZ and EPZ. This facility can be extended to new accounts whose track record has been good. Pre-shipment credit on running account basis can be granted for export of any commodity without insisting on prior lodgement of Letter of Credit/firm export order on condition that it is submitted within the reasonable time limit not later than 30 days from the date of advance but prior to the date of shipment OPERATIONAL GUIDELINES FOR PACKING CREDIT A/C To open the account, an application should be obtained in a separate account opening form. The branch should follow the procedure similar to those for the opening of a CD account like introduction, resolution (in case of companies), mandate, operating instruction/s, specimen signatures of authorised signatories etc. All export orders / contracts / LCs for drawal of pre-shipment advance has to be controlled in the Finacle under EXPODM Menu. Drawing power should be calculated as per the laid down procedure in para 4.7.d Disbursal from Packing Credit account will be transferred to PC Disbursal account based on requirements. Request for disbursement should be based on the orders / LCs submitted to the Branch. Exporters will issue cheques from PC Disbursal account to his suppliers etc. The account opening form obtained for Running PC account will be valid for PC Disbursal account also. A letter to the effect is to be obtained from the exporter. 25

26 Packing Credit Disbursal Account will be either in credit balance or with zero balance. It should never be in the debit balance at the end of the day. Separate requests are to be obtained from the party for transfer of lump sum amount by debiting Packing Credit Account to PC Disbursal account, based on actual needs. While running RPCTM Menu at the end of the day, Option E to be used in addition to using options D & I to link the export order / LC already lodged under EXPODM Menu. On submission of export documents for liquidation of packing credit advance, the outstanding in the PC account will be adjusted on first-in-first-out basis and interest will be calculated and applied according to the debit balance in PC account. Contract Register should be maintained as usual and funds transferred from Packing Credit account and repayments by way of export bills should be appropriated. Packing Credit department (where necessary in larger branches) should keep copies of resolutions, mandate letters, lists of authorised signatories and specimen signature cards for each Packing Credit account separately. Cash disbursal may be permitted where raw materials, stocks etc. are to be paid in cash as per trade practices, which should be selective / specific case basis and should not be a general practice. Branch should, however, ensure availability of DP and verify the end-use of advance. A portion of the advance which might be initially clean is to be secured by procurement of stocks and submission of stock statement by the customer within 15 days of disbursal. The inspecting official should verify the purchases/sales invoices and make their observations in the periodical inspection report submitted along with the stock inspection report sent to Regional Office/controlling office, etc. In case of imported raw materials used for exports, payment for retirement of import documents may be made to the debit of PC Disbursal account, whenever requested by the borrower. This is permitted for payment of Import documents received on DP / Sight basis. 26

27 On receipt of cheques drawn on PC Disbursal account, the availability of drawing power is to be verified and provided the cheque is otherwise in order, it may be debited to the party's PCD a/c. In case of non availability of drawing power the cheque is to be returned with the reason 'Not arranged for' SUPERVISION OF THE ADVANCE Ensuring the end use of funds under Packing Credit is an important function since its purpose entitles the borrower to concessional rate of interest and preferential treatment in lending. Branch must, therefore, be vigilant about the use of the Packing Credit. When a customer enjoys Packing credit and also Cash Credit facility against stocks, there is a possibility of double financing as goods purchased with Packing Credit funds may be offered as cover for the outstanding under Cash Credit. This should be carefully watched while inspecting the stocks under both facilities. The stocks should preferably be segregated facility wise and stock statement obtained separately, or alternatively facility wise stocks should be shown separately if a single stock statement is submitted. Periodical inspection of stocks and books of the borrower must be undertaken to ensure that the monies borrowed are in fact used for the purpose for which they were lent. Inspection report must be prepared and sent to Regional Office as may be required. The Packing Credit a/c should be backed by sufficient valid export orders/ LCs in addition to sufficient stocks to cover the advance and specified margin. Inspecting Officials should verify purchase invoices and mention to that effect be made in the inspection report. Branches must closely monitor the operations in the account of the borrowers to keep track of the general health of the advances extended to the exporters. The last date for shipment given in contract/lc has to be diarised. In the event of delay in shipment branch has to follow up for obtaining documentary evidence for extending last date for shipment, expiry date of LC/contract as the case may be, (Annexure No. 4(4)). Instances of delay in shipment and the efforts made by the branch towards obtaining extension of the shipment time/amendment to LC / substitution of order be informed to Regional Office/Controlling Office at periodic intervals. Branch should diarise the due date of advance for the purpose 27