1. Pre-Shipment Finance
A pre requisite to avail of pre-shipment financing is that the Exporter should have a
credit facility in place with a bank. Each bank has a credit process that determines
the amount of funding the bank can give the company.
1. Who is eligible for pre-shipment credit?
An exporter who holds an export order or Letter of Credit (LC) in his own
name to perform an export contract can avail of pre-shipment credit.
Banks may also grant pre-shipment advances without insisting on prior
lodgment of LCs or purchase orders. This is known as the "Running Account
Facility".
2. What is the purpose of this finance?
Pre-shipment finance can be availed of only for the specific purpose of
procuring raw materials / purchasing / manufacturing / processing /
transporting / warehousing / packing and shipping the goods meant for export.
3. How much financing can I as an exporter get?
This is ‘need based financing’, - which means that banks will lend an amount to you
after factoring in a particular margin (this margin is calculated as a percentage of the
value of the order). The margin differs from bank to bank. Margins are stipulated for
the following reasons :
to ensure that the exporter has some stake in the transaction
to cover any erosion in the value of goods, and
to ensure that there is no lending against the exporter's profit margin.
The banking practice is that the exporter can obtain 90% of the FOB value of the
order or 75% of the CIF value of the order.
1. What is the tenor of this funding?
The RBI has allowed banks to grant this funding at a concession for a
maximum period of 180 days. This period can be extended by the bank
without referring to RBI for a further period of 90 days. Banks grant this
extension in cases where the exporter faces genuine hardships in completing
his order.
If an extension is required beyond 270 days (i.e. 180+90 days), the RBI has
the discretion to grant another (maximum) extension of 90 days. However, if
the exports do not take place at the end of this period, the bank will charge
interest from day one, at a rate left to the bank’s discretion.

2. 2. In what currency's can the exporter obtain pre-shipment credit?
Most often the pre-shipment borrowal is in the domestic currency, in the case
of an exporter based in India, the Indian Rupee. However in some cases, the
exporter may want to borrow in foreign currency because his product has a
large import component or he finds the cost of borrowing in foreign currency
lower than borrowing in the local currency. Borrowing in foreign currency is
feasible when the cost of Rupee borrowing (less the currency premium) is
greater than the cost of borrowing in the foreign currency. This is discussed in
greater detail in " when does foreign currency risk arise?"
This will be easier to understand with the help of an example. Let us assume
that an exporters’ exports and imports are both payable in US Dollars. Let us
also assume that the import component is significant at, say, 70%. In this
case, the exporter is open to the effects of currency movements both at the
time of import, and then at the time of export. Borrowing in USD can hence
partially hedge his currency risk on the export side, since his exports are also
going to be in the same currency.
The above facility, allowed to exporters to avail of pre-shipment credit in
foreign currency, is termed as ‘Pre-Shipment Credit in Foreign Currency’
or PCFC.
3. What is the cost of pre-shipment finance ?
Pre-shipment credit :
Upto 180 days - 10%
Between 180 –270 days - 13%
Over 270 days - Commercial rates which are likely to be higher than the rate
applicable upto 270 days.
USD Lending (PCFC) - Maximum of Libor + 1.5 pct
4. What are the ways in which I can liquidate the pre-shipment finance ?
The pre-shipment facility can be liquidated by proceeds of export bills negotiated,
purchased or discounted. As far as possible, banks don't encourage liquidation by
debit to cash credit account.
Another interesting thing is that, once the goods are shipped out and documents
tendered to the bank, the pre-shipment advance is converted to post-shipment
advance.
In the case of PCFC credit, pre-shipment finance is liquidated by discounting bills
under the ‘Rediscounting of Export Bills Abroad’ scheme. PCFC can be liquidated by

3. discounting of export bills, or by grant of foreign currency loans by a bank. Once the
exporter avails of PCFC, he will not be eligible for post-shipment credit in rupees; he
will have to avail of post-shipment funding in the same currency in which he availed
of the pre-shipment funding.

4. Post Shipment Finance
Post-shipment finance is a loan or advance granted by a bank to an exporter of
goods from India. This facility is available to an exporter subsequent to the date of
shipment of goods upto the date of realisation of export proceeds.
Some key features of post-shipment finance are as follows:
Finance is extended to either the exporter (seller's credit) or the overseas
buyer of the goods (buyer's credit).
Finance is extended against evidence of shipping documents.
Concessive rate of interest is available for a maximum period of 180 days,
starting from the date of submission of documents. Normally, the documents
are to be submitted within 21days from the date of shipment.
Post-shipment finance can be further classified as under :
a. Negotiation of export documents under Letter of Credit (LC).
b. Purchase / Discount of export document under confirmed orders / export
contracts, etc.
c. Advances against export bills sent on collection basis.
1. Who is eligible for post-shipment finance?
Post-shipment finance is extended to the actual exporter who has exported
the goods or to an exporter in whose name the export documents are
transferred.
2. On what basis is post-shipment finance extended?
It is extended against evidence of shipment of export goods.
3. What is the purpose of post-shipment finance?
Post shipment finance is meant to finance export receivables.
4. What is the quantum of this finance?
Post shipment finance can be extended upto 100% of the invoice value of
goods.
5.
6. What is the period for which this funding is available?
In the case of routine exports, the maximum period allowed for realisation of
export proceeds is 6 months from the date of shipment. Banks can extend
post shipment finance at a lower interest rate upto the normal transit period or

5. the notional due dates (this is calculated as the sum of the Normal Transit
Period + Usance Period, subject to a maximum of 180 days). Beyond that
period, banks lend at non-concessive rates or the normal commercial rates.
7. What are the applicable rates of Interest?
Post-shipment credit
Sight Bills - Not more than 10%
Upto 90 days - Not more than 10%
91 days upto 6 months - 12%
Overdue (applicable only on the overdue portion) - Left to the discretion of the bank,
though it is most likely to be the unarranged overdraft rate.
Post-Shipment foreign currency loan - Maximum of Libor + 1.5 pct