POST SHIPMENT FINANCE

Post-shipment finance may be defined as loan or advance granted by the bank to

the exporter after the date of shipment of goods till the date of realisation of
export proceeds. It includes any advance granted on the security or in
consideration of the amount of duty drawback or any kind of receivable in the
form of incentives to be received from Government. While granting advances
for post-shipment, banks are guided by the directives of RBI, the rules of
Foreign Exchanger Dealers’ Association of India, the Trade Control and
Exchange Control Regulations and the International Conventions and Codes of
the International Chamber of Commerce. The quantum of credit depends on
export sales and receivables.
Compliance of Exchange Control Provisions
Post-shipment finance is granted under various methods. Exporter seeks the
sanction of appropriate type advance from the bank, depending upon the actual
requirement. Bank scrutinises the following documents to verify the compliance
of exchange control provisions by the exporter: (a) Whether the documents are
drawn in permitted currencies and the payment receivable is under permitted
method of payment. (b) Whether the relevant GR/PP is duly certified by the
customs authorities and the particulars contained are consistent with the
particulars in other documents and export contract/firm order/letter of credit. (c)
The documents are submitted for negotiation within the prescribed period and in
case of delay, delay is supported by sufficient documentary proof. (d) Usance
bill is in consonance with the time limit fixed.
Types of Post-Shipment of Finance
Let us discuss the various types of post-shipment finance.
1. Negotiation of Export Documents under Letters of Credit When the export
bill is drawn under letter of credit arrangement, it is the duty of negotiating bank
to scrutinise carefully whether all the documents required under L/C are
presented and they are drawn in conformity to the terms of letter of credit. If the
documents are in order and comply with the total terms of letter of credit only,
the negotiating bank makes the payment to the exporter. Even if there is
slightest deviation from the terms of letter of credit or there is even minor
discrepancy in the documents, the negotiating bank does not make the payment
to the exporter. There is no distinction between major and minor discrepancy. If
the documents are not in order, even after the negotiating bank makes payment
to the exporter, opening bank does not make reimbursement to the negotiating
bank.
2.Purchase/Discount of Foreign Bills When the exporter has not received the
letter of credit from the importer, as mode of payment, exporter requests the
bank to purchase / discount documents for receiving immediate payment. Bill
may be drawn on D/A (Documents against Acceptance) or D/P (Documents
against Payment) basis, dependant on the terms of the export contract. Bank
hands over the documents only on receipt of payment from buyer, in case of
D/P basis. So, bank is reasonably secured in case of default in payment as title
to goods is in possession of the bank. In case of D/A bills, document of title
would be given to the buyer, on acceptance of the usance bill. So, risk is greater
to the bank as no security lies with the bank, in case of default in payment by
the importer. The credit worthiness of the buyer is important in such a case.
When the exporter enjoys the sanctioned limit for purchase/discount of bills,
exporter can get the funds immediately. When it is D/P bill, the bank purchases
it. The term ‘discount’ is used in case of D/A bill. To cover the risk, banks insist
on the exporter to take ECGC policy in favour of the exporter and assign the
policy in favour of bank. Under the policy, ECGC may fix payment terms and
limits to the individual buyers and bank has to ensure that the limits are not
exceeded while purchasing the bills. More so, banks can also take guarantee
from ECGC in respect of post-shipment finance either on selective or whole
turnover basis. If the buyers are new, banks may also obtain credit reports about
the buyers before purchasing the bills, drawn on them.
3. Advance Against Export Bills Sent on Collection Bills drawn on importer are
sent on collection basis through the bank under the following circumstances: (a)
When the documents drawn under L/C contain any discrepancies but bank is
confident that the buyer will retire the documents and (b) When the bill
purchase limit of the exporter is exhausted and bank is not willing to sanction
additional limit. Under the above circumstances, bank may finance a part of the
total bill amount as advance. As and when the bill is realised, the advance will
be liquidated and the bank will pay the balance to the exporter. This advance
carries the same rate of interest, applicable to post-shipment finance.
4. Advance Against Exports Sent on Consignment Basis Sometimes, exports
are made on consignment basis. Until the sale is made in respect of goods sent
on consignment, title to the goods remains with the exporter. Consignment
exports are treated at par with outright sales. So, rules and regulations of pre-
shipment finance applicable to outright sale is equally applicable to
consignment exports.
5. Advance Against Export Incentives Advances against export incentives are
sanctioned by bank both at pre-shipment and post-shipment stage. Advance
under this category is sanctioned when the exporter has to receive the duty
drawback incentive from Government, refund of customs and excise duty and
differential between the indigenous and international prices of raw materials.
Normally, in such case, bank gets power of attorney executed by the exporter in
favour of bank and registers with the concerned authority such as Director
General of Foreign Trade, Commissioner of Customs etc. Bank sanctions this
type of advance only when the bank grants other facilities to the same exporter.
6. Advance Against Undrawn Balances Sometimes, the exporter does not draw
the bill for the full value of the invoice as per custom of trade in that particular
line of business. A part of the invoice value is not drawn due to difference in
weight, quality and other factors, not fully settled between the exporter and
importer. Buyer settles the final price only after inspection and approval of the
goods. Bank advances against the undrawn balance to facilitate the exporter.
The undrawn balance cannot be more than 5% of the total invoice value. The
exporter has to give undertaking to realise and surrender the balance amount too
within the prescribed period of 180 days from the date of shipment of goods.
7. Advance Against Retention Money In case of some exports, in particular
capital goods and project exports, buyer withholds a small part of the invoice
value towards guarantee of performance. If this balance amount is payable
within one year from the date of shipment of goods/services, banks advance
against such retention money at concessional rate of interest. The maximum
period of advance is 90 days. However, if the retention money is payable after a
period of one year from the date of shipment of goods, such advances are to be
treated as deferred payment advances. In such cases, banks do not extend
concessional interest rate. The rate of interest will be as determined by the bank.
8. Post-shipment Credit in Foreign Currency The exporter has the option of
availing the post-shipment credit in Indian rupees or foreign currency. When the
exporter opts to avail the credit in foreign currency, the interest rate will be
linked to LIBOR (London Inter Bank Offered Rate). The credit has to be
liquidated in foreign currency.
9. Buyers’ Credit Under the Buyers’ Credit scheme, buyer is extended credit by
a financial institution or consortium of financial institutions. Exporter gets the
payment immediately. When the financial institution is located in supplier’s
country, there is no transfer of funds from one country to another as the
financial institution in India makes remittances in Indian rupees to the exporter
and gets repayment of loan in foreign currency. However, if the financial
institution is located in the buyer’s country, there is immediate remittance of
funds from the buyer’s country to the supplier’s country to enable the supplier
to get payment. This type of credit is normally extended for capital goods.
RBI’s approval is needed in extending the buyer’s credit as payment is made to
the exporter on behalf of resident buyer. The authorised dealer should make
application, in Form DPX 6, for this purpose.
10. Line of Credit When a number of buyers are located in the same country,
instead of extending credit to different buyers, line of credit is extended to a
financial institution located in the buyer’s country by the financial institution
from seller’s country. The advantage is that the responsibility in judging the
creditworthiness of different buyers and recovery from them is shifted to that
financial institution located in buyer’s country. In this process, the financial
institution extending line of credit, in the exporter’s country, becomes totally
free from the worries connected with identifying the buyers, in importer’s
country, and recovering from them.