Post shipment finance is provided for bridging the gap between the shipment of goods and the realization of export proceeds. The later is done by the banks by purchasing or negotiating the export documents or by extending against export bills accepted on a collection basis.
While doing so, the banks adjust the pre-shipment advance, if any, already granted to the exporter.
There is always a time gap between the shipment of goods and receipt of payment from the importer. The exporter needs finance for this intervening period.
The commercial banks provide the financing facility to the export for this purpose, known as post-shipment finance.
Different Types of Post Shipment Finance
Post shipment finance can be classified in the figure below:
1. Negotiation of Export Documents Drawn under L/C
The banks take up the negotiation of the documents drawn under the irrevocable letters of credit only.
As far as a revocable letter of credit is concerned, the banks don’t take up the negotiation of documents drawn under such letters of credit.
Where the exports are under the letter of credit arrangements, the banks will negotiate the export bills provided it is drawn in conformity with the letter of credit.
The exporter should submit the documents for negotiation as stipulated in the letter of credit.
Generally, the following documents are stipulated in the letter of credit:
- Sight or usance bill of exchange, as required.
- Commercial invoice/customs invoice.
- Packing list.
- Full set of clean onboard bill of lading (all negotiable copies) or airway bill.
- Certificate of origin/GSP certificate of origin.
- Certificate of inspection.
- Marine insurance policy/Certificate in duplicate.
- Any other document as required by the buyer.
- Original letter of credit.
- Certificate of foreign inward remittance in case of an advance payment.
When an exporter presents documents to the bank for negotiation, the first step taken by the negotiating bank is to scrutinize the documents to determine if these are as per the terms and conditions of the letter of credit.
All the documents tendered should be strictly in accordance with the L/C terms. It is to be noted that the L/C issuing bank undertakes to honor its commitment only of the beneficiary submits the stipulated documents.
Even the slightest deviation from those specified in the L/C can give an excuse to the issuing bank of refusing the reimbursement of the payment that might have been already byte negotiating bank.
2. Purchase of Export Document Drawn under Export Order
Purchase or discount facilities in respect of export bills drawn under confirmed export orders are generally granted to the customers who are enjoying Bill purchase/ discounting limits from the bank.
As in case of purchase or discounting of export documents drawn under export order, the security offered under L/C by way of substitution of creditworthiness of the buyer by the issuing bank is not available, the bank financing is totally dependent upon the creditworthiness of the buyer like the importer, as well as that of the exporter or the beneficiary.
The documents drawn on DP basis are parted with through foreign correspondent only when payment is received while in case of DA bills documents (including that of title to the goods) are passed on to the overseas importer against the acceptance of the draft to make a payment on maturity. DA bills are thus unsecured.
Bank financing against export bills is open to the risk of non-payment.
Banks, in order to enhance security, generally opt for ECGC policies and guarantees which are issued in favor of the exporter/banks to protect their interest on a percentage basis in case of non-payment or delayed payment which is not on account of mischief, mistake or negligence on the part of the exporter.
Within the total limit of policy issued to the customer, drawee wise limits are generally fixed for individual customers.
At the time of purchasing the bill, the bank has to ascertain that this drawee limit is not exceeded so as to make the bank ineligible for a claim in case of non-payment.
3. Advance against Export Bills Sent on Collection
It may sometimes be possible to avail advance against export bills sent on collection.
In such cases, the export bills are sent by the bank on a collection basis as against their purchase/discounting by the bank.
Advance against such bills is granted by way of a separate loan usually termed as post shipment loan.
This facility is, in fact, another form of a post-shipment advance and is sanctioned by the bank on the same terms and conditions as applicable to the facility of negotiation/purchase/discount of export bills.
A margin of 10 to 25% is, however, stipulated in such cases. The rates of interest, etc., chargeable on this facility are also governed by the same rules.
This type of facility is, however, not very popular and most of the advances against export nills are made by the bank by way of negotiation/purchase/discount.
4. Advance against Goods Sent on Consignment Basis
When the goods are exported on a consignment basis at the risk of the exporter for sale and eventual remittance of sale proceeds to him by the agent/consignee, the bank may finance against such transaction subject to the customer enjoying specific limit to that effect.
However, the bank should ensure while forwarding shipping document to its overseas branch/correspondent to instruct the latter to deliver the document only against trust receipt/undertaking to deliver the sale proceeds by a specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value ios drawn in advance against the exports.
5. Advance against Undrawn Balance
In certain lines of export, it is the trade practice that bills are not to be drawn for the full invoice value of the goods but to leave small part undrawn for payment after adjustment due to differences in rates, weight, quality, etc. to be ascertained after approval and inspection of the goods.
Banks to finance against the undrawn balance if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line balance line of export subject to a maximum of 10% of the value of export and an undertaking is obtained from the exporter that he will, within six months from the due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.
Against by the exporter and the finance can be made available accordingly at a higher rate.
Since the actual amount to be realized out of the undrawn balance, may be less than the undrawn balance, it is necessary to keep a margin on such advance.
6. Advance Against Retention Money
Banks also grant advances against retention money, which is payable within one year from the date shipment, at a concession rate of interest up to ninety days.
If such advances extend beyond one year, they are treated as deferred payment advances which are also eligible for concessional rate of interest.
7. Advance against Claims of Duty Drawback
Duty drawback is permitted against the export of different categories of goods under the ‘Customs and central excise duty drawback rules, 1995.
The drawback in relation to goods manufactured in India and exported means a rebate of duties chargeable on any imported materials or excisable materials used in the manufacture of such goods in India or rebate on excise duty chargeable under central excises act, 1944 on certain specified goods.
The duty drawback scheme is administered by the Directorate of duty drawback is to be filed by the exporter.
A copy of the shipping bill presented by the exporter at the time of making shipment of goods serves the purpose of the claim of duty drawback as well.
This claim is provisionally accepted by the customers at the time of shipment and the shipping bill is duly verified. The claim is settled by the customs office later.
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