CRIDIT MANAGMENT

MBA Banking & Finance

3rd Term
Export Financing
The present export finance scheme was introduced by the
SBP in October 1977.
This was substitution of scheme announced in 1973 under
the name of refinance scheme for non traditional and
newly emerging exports.
The export credit fund was established by the state bank of
Pakistan in 1971through an amendment of the state
bank of Pakistan act 1956,Which enabled the banks to
provide refinance to commercial banks and credit
institutions against their medium term and long term
loans and advances to exporters.
Feature of Export Financing Scheme
1. It operate in two parts Part-I and part-II.

Part-I of scheme provides for grant of export finance to the

exporters on case to case basis against irrevocable letter
of credit
Part-II of the scheme on the other hand allows sanctioning
of export finance limit to exporters on the basis of their
previous year’s exporter performance.
2. Exporters are free to export finance under both the part of
the scheme either separately or simultaneously.
3. Export of all commodities are eligible for export finance
under both the parts of the scheme.
Export on consignment basis are eligible for the export
finance under Part -II of the scheme but not under
Part-I.
5. Export finance is provided to an exporter at rate not
exceeding 4% per annum. i.e. At half the normal lending
rates of 13 % is charged by the commercial bank. In
this case 2.50% is to be paid to the state bank of
Pakistan.
6. Whether or not refinance is obtained by the bank the
export finance under the scheme has to be provided to
the exporter at concession rate.
7. The export finance provided under the scheme is
exempted by the maximum per party lending limit as
laid down by the SBP.
8. The security aspect of the advance is left to the
discretion of lending bank.
9. Pre shipment and post shipment advances allowed under
Part-I of the scheme, subject to the period does not
exceed 180 days.
10. Under Part-II of the scheme export finance limit are
allowed presently at 50 % of the exporter, export
performance.
11. The export finance limit is allowed under Part-II of the
scheme is for full financial year on revolving basis and is to
be operated like cash credit.
12. The borrowing limit will continue to remain at 50% of the
exporter previous year performance through out the
financial year.
13. The exporter is free to obtain export finance under Part-II
of the scheme from more then one bank to the total amount
not exceeding his borrowing entitlement at 50%.
14. The export finance obtained under Part-II of the scheme
is required to be matched with the export proceeds realized
during the relative monitoring period, comprises of one year.
15. Substitution of the firm export order or letter of credit
with the new firm order or letter of credit in respect of
export finance allowed under Part-I of the scheme was
being considered by the SBP on case to case basis.
Types of Export Financing
1. Pre -shipment Finance for Export.
2. Post -shipment Finance for Export
Pre-shipment Finance for Export.
Meaning: Pre-shipment is also referred as “packing credit”.
It is working capital finance provided by commercial banks
to the exporter prior to shipment of goods. The finance
required to meet various expenses before shipment of
goods is called pre-shipment finance or packing credit.

When exporter is looking for financial help from the bank

before shipment of export goods.
A limit is got sanctioned from controlling office.
After sanction of limit following documents are
obtained from the exporter.
1. D.P. Note with finance amount and 16.80% add on.
2. Undertaking under part 1 (IB 10)
3. Under taking under part 1 (IB 10A)
4. Form E.C (IB 15)
5. Copy of firm contract L/C
6. Declaration certifying detail of previous finance
7. Agreement for financing on Markup basis IB 6
8. Invoice
Note:
The D.P. Note, (IB 10), (IB 10A) and (IB 6) must
contains appropriate value of stamps as per provincial
stamps etc.
One copy of the above noted documents is retained in
the branch and other copies are forwarded to the
coordination division of the bank head office, where one
copy is retained and rest of copies are submitted to SBP
to obtain refinance. However,
Finance to parties are allowed before obtaining refinance
from State Bank of Pakistan.
Security
A part of any collateral security as per sanctioned limit,
the primary security , valid export L/C or contract and
hypothecation/Pledge (as the case may be) of stock of
exportable commodities is obtained by way of stock
report duly Verified by the inspecting officer/staff.
Repayment
As per under taking (IB 10) the exporter undertakes to
submit the export documents for negotiation/collection
to the bank/branch from whom refinance is obtained.
The refinance is adjusted at the time of negotiation.
However if negotiation is not made within 180 days of
refinance , the same is paid to SBP on due date.
Mark up Procedure
Mark up is charged at the rate of 4% per annum out of
which 2.5% is to be paid to SBP on closing. Rest of the
1.5% to be credited to bank’s income A/C mark up
recovered.
In case of failure to export the goods or delay in export
for reasons beyond the control of exporters. The SBP
may at its absolute /sole discretion waive/refund the
entire penalty.
Mark up
Mark up at the rate of 4% per annum out of which 2.50%
is paid to SBP by the commercial bank. Mark up is charged
at the time of realization/adjustment of the finance and for
finance on half yearly basis.

Post-shipment Finance for Export

Meaning: Post shipment finance is provided to meet working
capital requirements after the actual shipment of goods. It
bridges the financial gap between the date of shipment and
actual receipt of payment from overseas buyer thereof.
Whereas the finance provided after shipment of goods is
called post-shipment finance.
When the exporter send their export bill on collection basis,
they may avail post shipment finance under Part-I of
export refinance scheme. It is allowed on case to case
basis, subject to sanctioned limit fro head
office/controlling office, and its strict terms
 Following documents are submitted by exporters for post
shipment refinance, apart from other documents
/formalities to be observed in term of sanction advice.
1. Demand promissory note for the finance value.
2. Undertaking IB 10
3. Letter of buy back cum indemnity IB 9.
4. Letter of discounting of export bill IB 20.
5. Demand promissory note for mark up value
6. Three copies of invoices
7. Three copies of transport documents B/L (Bill of landing)
or AWB airway Bills.
8. Three copies of firm contract or L?C
9. Three copies of form “E”
10. Declaration regarding previous finance if any.
11. Mark up agreement IB 6
12. Short shipment notice if any
13. Form EC
Security:
The exporter bill against which finance provided is the
primary security. A collateral security is obtained as per
term of sanction advice.
Repayment Procedure
Finance is repaid to SBP through coordinating office on
realization of proceeds or at due Date after 180 days
which ever occur first, failing which penalty is charged
by the SBP
Penalty: No penalty is charged in case of post shipment
finance. However, exporters are liable to repatriate the
proceeds of sale proceeds of exports in accordance
with exchange control regulations etc.
4. Speculative credits: Credit is also used for speculative
purposes. The speculator may borrow funds from the
commercial banks or from the brokers for the nominal
purchases of commodities or securities to make profit on
A/c of change in prices.

Classification of credit on the basis

of its Maturity
1. Long term credit (3 to 5 years)
2. Intermediate term credit ( 1 to 3 years)
3. Short term credit ( Less then 1 years)

4. Demand credit. ( Payable on demand)

Classification of credit on the basis
of the nature of the Debtors
Date after 180 days which ever occur first, failing which penalty
is charged by the SBP

Penalty:
No penalty is charged in case of post shipment finance.
However, exporters are liable to repatriate the proceeds of
sale proceeds of exports in accordance with exchange
control regulations etc.
Credit Policy Constituents
Credit policy refers to the carefully documented
instruction issued to each part of the operation to
ensure the correct procedures are being followed by
their respective staff, so that each knows its own
precise involvement and responsibility.

Following points must be consider in credit policy:

1. The choice of credit Facility
Full consideration should be given to the various credit
facilities available, with the joint aim of satisfying needs
of customers and to achieve maximum benefit for the
business.
2. The credit application
The manner in which the customer’s application or credit
is dealt with will depend on the type of business being
conducted.

3. Credit decision
There must be credit office or credit department to
assess the applicant using different tools and techniques
making decision.
There are no marginal formulas for assessing the
probability that a customer will not pay. The collection of
credit information and its assessment is generally used
as a tool to make credit decision.
Credit evaluating and scoring
Five C’s
1. Character: the customer’s willingness to meet credit
obligation.
2. Capacity: the customer’s ability to meet credit
obligation out of operational cash flows.
3. Capital: the Customer’s financial reserves.
4. Collateral: A pledged assets in case of default.
5. Conditions: general economic conditions in the in the
customer’s line of business.

Credit Scoring: The process of quantifying the probability

of default when granting consumer credit.
Credit Information

The information commonly used to assess the credit worthiness

included the followings;

1. Financial statements
2. Credit report on customer’s payment history with other
firms (rating agencies, like poor and standard, Dun and
bradstreet, etc.)
3. Banks
4. The customer’s payment history with the firm.
Analyzing credit Policy
Credit policy effects
In evaluating credit policy there will be five basic factors
to consider.
Revenue effect: If firm grants credit, then there will be
delay in revenue collections as some customers take
advantage of the credit offered and pay later. How ever the
firm may be able to charge the higher price if grants credit and
it may be able to increase the quantity sold. Total revenue
thus may increase.