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    How to avail post-shipment credit and what should exporters be aware of

    Synopsis

    The Commerce Ministry initiated post-shipment credit as a short-term trade finance solution to help exporters tide over their working capital requirements for the time between dispatching goods and receiving payment from overseas buyers.

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    A majority of commercial banks extend post-shipment credit up to Rs 10 crore. Domestic exporters can get loans of up to Rs 50 crore.
    A trade that crosses geographical boundaries can be a time-taking activity. Moreover, there is an uncertainty over the overseas buyer releasing payments. There have been instances when exporters have had to wait for long to get payments. This interim period can turn out to be long enough to severely impact the working capital cycle of domestic exporters. Most of these players rely on the payment cash to continue doing businesses. A disruption in the money cycle can be a body blow.

    A majority of Indian exporters, particularly small-scale ones, manage with sparse working capital. Unlike their bigger counterparts, these SMEs don’t enjoy enough financial elbow room to tide over such a phase. What recourse is available to exporters in such cases?

    The Commerce Ministry initiated the concept of post-shipment credit to ease exporters’ burden in such a situation. Post-shipment credit refers to the credit extended to exporters after the goods are shipped. This money is to help exporters meet working capital requirements, such as purchasing raw materials and meeting other business expenses.

    The Reserve Bank of India (RBI) defines post-shipment credit as: “Any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from India from the date of extending credit after shipment of goods/rendering of services to the date of realisation of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the government from time to time.”
    For obvious reasons, post-shipment credit is immensely beneficial to exporting firms. Apart from reducing working capital issues, the mechanism also gives exporters the flexibility to extend the credit period to foreign buyers. A number of financial institutions, including the EXIM Bank of India, leading commercial banks, and non-banking financial institutions (NBFCs), extend post-shipment credit to eligible borrowers at a concessional interest rate.

    Who is eligible for post-shipment credit?
    According to the norms laid out by the Directorate General of Foreign Trade (DGFT), all types of exporters — including merchant exporters, manufacturer exporters, export houses, trading houses, and manufacturers supplying goods to merchant exporters, export houses and trading houses — are eligible to apply. Generally, the scheme doesn't ask for collateral from exporters. How then can financial institutions decide on the creditworthiness of an exporter applying for post-shipment credit?

    According to Milan Thakkar, CEO of Mumbai-based exporting firm Walplast, an exporter can get 80% of cost, insurance and freight (CIF) invoice amount as credit after submitting the relevant documents to the bank. The balance 20% can be availed of when the importer makes the final payment. “However, this percentage differs from bank to bank and on a case-to-case basis. The credit is granted for a maximum of 180 days but it can be further extended for 90 days with RBI’s permission,” Thakkar says.

    Who to approach to get post-shipment credit?
    Currently, nationalised, private and cooperative banks offer this facility as a specialised type of lending. Exim Bank of India — a specialised financial institution mandated to provide financial assistance to exporters and importers — also does it.

    A majority of commercial banks extend post-shipment credit up to Rs 10 crore. Domestic exporters can get loans of up to Rs 50 crore. The credit limits are generally operated as a running account facility. The facilities can be drawn in either the rupee or in a foreign currency, say bankers.

    Exim Bank’s portal says an exporting entity has to meet certain criteria to get the help. First, the applicant has to be an Indian exporter with a proven track record. The credit amount should be within the maximum permissible bank finance (MPBF) of the borrower's limit. A margin of around 10% under post-shipment credit is applicable. Adequate security might be required in some cases. Typically, security in this facility includes an appropriate charge on the current assets, including export receivables and ECGC cover.

    NBFCs are also mandated to extend post-shipment credit to deserving domestic exporters. NBFCs enjoy a wider reach compared with banks and so remain the preferred lender for such loans for many MSMEs based out of tier-2/3 cities.

    Documents required for post-shipment credit
    Typically, financial institutions, including commercial banks, ask for certain papers to ascertain whether the export consignments have left the domestic shores or not. The common documents used for this purpose are: Bill of lading/airway bill, commercial invoice, certificate of origin, inspection certificate, letter of credit, insurance certificate, import export code certificate and packing list, among others. The lender could ask for other documents too based on the transaction.

    Do’s and Don’ts of post export credit
    Just like in any other business transaction, there are certain dos and don’ts that should be followed before obtaining a post-export credit facility. Industry experts say any type of financing comes at a cost and post-export credit is no different. Further, a payment default can tarnish the reputation of the exporter, sometimes on a global scale.

    As all banks ask for evidence of goods shipped, Thakkar of Walplast advises exporters to ensure that the exporter's bank explicitly instructs the importer's bank to get the bills of exchange noted and lodge a protest in case of non-acceptance/payment.

    “Exporters should obtain a credit report of the buyers from the Export Credit Guarantee Corporation of India (ECGC) before dealing with them. Also, they should not change the payment terms after shipment,” he says. Exporters should also be aware that they can be a victim of unscrupulous activities or hacking, which is quite common these days.

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