What is Pre-Shipment Finance? and its Types

Pre-shipment finance is given for working capital for the purchase of raw material, processing, packing, transportation, warehousing, etc., of the goods, meant for export.

Pre-shipment is also referred to as “packing credit”. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods.

Pre-shipment finance is the financial assistance extended to the exporters, before the shipment of export goods.

Meaning

Pre-shipment finance is a facility to provide working capital finance to an exporter for the purposes of exports.

The basic purpose of granting this facility is to enable the eligible exporters to procure raw materials, suppliers, processes, or manufacture or warehouse or ship the goods meant for export.

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Types of Pre-Shipment Finance

Pre-shipment a be classified into the following three categories as:

1. Packing Credit

Packing credit refers to the credit granted by a bank to enable pack the goods meant for exports.

It includes the loan or advance or credit granted by a bank to an exporter for financing the purchase of raw materials, suppliers, etc.

Required for processing or manufacture of the goods as well as for the purchase of packaging and packing materials required to pack the goods to make them ready for their shipment to a foreign country.

Packing credit is granted on the basis of a confirmed export order or an irrevocable letter of credit opened by an importer in favor of exporter from India or any other evidence of an order for export placed by a foreign buyer with Indian exporter.

2. Packing Credit Against Incentives Receivables

Generally, the advance against incentives receivables from the government of Inia is granted on the post-shipment stage.

types of pre shipment finance in export — types of pre-shipment finance in export

But in certain exceptional circumstances when the value of the materials to be procured for the execution of the order is more than the FOB value of the export order then the banks may grant packing credit against the number of incentives available from the government of India.

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Such advances are grated for a maximum period of 90 days.

The banks are free to charge the rate of interest within the ceiling of Prime Lending Rate (PLR) minus 1.5% points.

Such advances are rapid against the negotiations of the export bills and the number of incentives received from the government of India.

3. Advance Against Cheques/Drafts Received as Advance Payment

The banks may grant advance to the exporters at concessional rates of interest notified by the Reserve Bank of India, against the proceeds to be realized by them in respect of any cheques or draft received by them as advance payment towards an export order.

This facility is extended by the banks to only those exporters who have an unblemished track record of dealings with the bank.

Thus, it is a kind of accommodation granted by the bank to the exporter for the transit period stipulated by the foreign exchange dealers association of India for collection of the instrument (cheque or draft) for till the date of realization of the proceeds thereof whichever is earlier.

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