With economies vying for a larger share of global trade that is forever changing, exporters can do with their fair share of help – those in India being no different. And while supply may not create demand at all times, easing the supply of capital to exporters is the least that can be done. The ‘Pre-Shipment Export Credit Scheme’ is one such shot in the arm of our Indian exporters. An exclusive report:

Shakti Shankar Patra | @TheDollarBiz

Let’s say you own a mango orchard and have been supplying mangoes to an importer in London for the past several years. Happy with the quality of your mangoes and the attractiveness of prices, the importer places an order for 10 MT of mangoes in the current year. Since the order is large, in order to honour it, you would need to make a large investment in terms of manpower, pesticides, equipment etc. But what if you don’t have the capital to make this investment? This is where the Pre-Shipment Export Credit Scheme comes handy. Thanks to the scheme, you can walk into a bank and avail credit just on the basis of the order placed by the importer. In fact, even if the investment that needs to be done in order to honour the order requires foreign currencies, the Reserve Bank of India (RBI) has got you covered. 

Deficit is forever

For a country like India that perennially runs a trade deficit, export promotion is at the top of every policymaker’s mind. [At least it should be!] Numerous schemes have been floated to provide stimulus to our exports in the past decade. The Pre-Shipment Export Credit Scheme has been a welcome scheme. As per RBI, “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, 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 been waived.” And to quote the central bank again, “The period for which a packing credit advance may be given by a bank will depend upon the circumstances of the individual case...” It is primarily for the banks – giving the credit advance – to decide on the period for which a packing credit advance may be given, giving due respect to one or various relevant factors affecting exports. This is, so that the period is sufficient to enable the exporter or trader to ship the goods or render the services.

No free lunches

Pre-Shipment credit has its own issues though. What if the credit availed is diverted for other purposes? And how does a bank keep track of the money that it has doled out for all practical purposes, it is an unsecured loan? As per RBI, “Each packing credit sanctioned should be maintained as a separate account for the purpose of monitoring the period of sanction and end-use of funds.” Therefore, banks may release the packing credit in one lump sum or in stages as per the requirement for executing the orders. “Banks may also maintain different accounts at various stages of processing, manufacturing, etc. depending on the types of goods/services to be exported (i.e., hypothecation, pledge, etc.) and may ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount, etc.” What the central bank recommends is that lending banks should continue to keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports. It is also important for banks to monitor the progress made by exporters in timely fulfillment of export orders. So, while pre-shipment credit provides an exporter with the required hand-holding, it in no way is a free-ride. It should not be. There are “no free lunches”. And we all know that. Even exporters!

Interest subvention

The RBI first introduced the scheme of Export Financing in 1967. Under the earlier scheme, the RBI fixed only the ceiling rate of interest for export credit. Banks were free to decide the rates of interest within the ceiling rates keeping in view the Benchmark Prime Lending Rate (BPLR) and spread guidelines taking into account track record of the borrowers and the risk perception. In order to enhance transparency in banks’ pricing of their loan products, banks were advised to fix their BPLR after taking into account the actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning and profit margin.

In 2007, the government announced a package of measures to provide interest rate subvention of 2 percentage points per annum on rupee export credit availed by exporters in nine categories of exports, viz., textiles (incl. handlooms), readymade garments, leather products, handicrafts, engineering products, processed agricultural products, marine products, sports goods and toys and to all exporters from the SME sector defined as micro enterprises, small enterprises and medium enterprises for a period from Apr. 1, 2007 to Sept. 30, 2008. The coverage was also extended to include jute and carpets, processed cashew, coffee and tea, solvent extracted de-oiled cake, plastics and linoleum. Further, in respect of leather and leather manufactures, marine products, all categories of textiles under the existing scheme (including readymade garments and carpets, excluding man-made fibre and handicrafts), the government provided additional subvention of 2% in pre-shipment credit for 180 days. In order to ensure that a borrower is not unduly affected by the high volatility in the forex market, the RBI has also directed banks to compute the export credit limits of borrowers in such a way that exporters would be insulated from rupee volatility. It has suggested that banks calculate the overall export credit limits on an on-going basis, say, monthly, based on the prevalent position of current assets, liabilities and exchange rates, and reallocate the limit towards export credit in foreign currency. “This may result in increasing or decreasing the rupee equivalent of the foreign currency component of export credit,” the RBI states.

Liquidation

But carrots don’t come without a stick. In case an 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., banks may allow exporters, to extinguish the excess packing credit by export bills drawn in respect of by-product like cashew shell oil, etc. 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, banks are required to charge 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. The government now allows pre-shipment finance 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 in FTP 2009-14.

Parting note

Financing banks have been advised to ensure that there is no double financing and the export credit is liquidated with remittances from abroad. Banks, however, have the autonomy to take into account the track record of the exporter/overseas counter party while sanctioning the export credit. Overall, Pre-shipment credit is more than mere lip-service. A scheme for the exporters and worth appreciating.