What are the types of post-shipment finance available from banks?

(This post provides details about Purchase of export bills, Discount of Export Bills, Negotiation of Export bills, Advance against Undrawn Balances on Export Bills, Advance against Retention Money, Advance against Duty Draw Back, Advance against Deemed Exports, Advance against export of Goods for Exhibition and Sale)

Post-shipment Export credit facility in banks means finance made to an exporter bank after the shipment of goods or service. The Authorised Dealers (AD banks) provide following types of post-shipment finance to the exporters.

Purchase of export bills

The exporter submits bill or drafts drawn under confirmed orders (without LC) to his bank for post-shipment finance. If the L/C is not available as security, the bank is totally dependent upon the creditworthiness of the exporter. Therefore the purchase facility is available only to those exporters whose track record has been good. 

Discount of Export Bills

Bills Discount refer to post-shipment finance made against Usance bills. If the L/C is not available as security, the bank is totally dependent upon the creditworthiness of the exporter. Commercial risks can be covered for usance bills, under the standard policy of ECGC. The risk is covered by ECGC only if the credit limit was already approved by them on each buyer to whom shipments are made on credit terms.

Negotiation of Export bills

The negotiation of the bill refers to post shipment advance made to an exporter against export bills. In negotiating export documents under a Letter of Credit, Bank will pay the amount of export bill under LC to the customer and will rely on the reimbursement by the Issuing Bank at a later date. Both sight and usance Letters of Credit can be negotiated by the bank. When the shipment is made by the exporter under LC terms, the bank verifies and ‘negotiate’  export bills. Mere examination of the documents without giving of value does not constitute a negotiation. When the exporter submits bill or draft drawn under LC to the bank, the bank verifies all necessary documents, submitted by the exporter, matching in terms of conditions stated in the L/C. If all documents are in order, the bank negotiates the bill and advance (post shipment finance) is granted to the exporter. The negotiating bank presents the bills negotiated by it to the Paying Bank. The bank which makes the payment under credit is called ‘Paying bank’.

Advance against Undrawn Balances on Export Bills

In the export trade of certain commodities where exporters are required to draw the bills on the overseas buyer at a reduced value, say around 2 to 10 percent margin, on FOB value of the contract. The balance (residuary), which is payable by the overseas buyer after satisfying himself about the quality/ quantity of goods is called as ‘undrawn balance’. Banks may consider granting advances against undrawn balances, mainly on the track record of the buyer, as much as the receivable under undrawn balance is contingent in nature.

Advance against Retention Money

In the cases of turnkey projects/construction contracts, a small percentage of the progressive payments are retained as retention money. The retention money is payable after the expiry of the stipulated period from the date of the completion of the contract after getting hold of the certificate(s) from the specified authority.

Exporters are normally advised to provide appropriate guarantees, instead of retention money and banks do not grant advance against retention money relating to services portion of the contract. However, Banks consider, granting of advances against retention money relating to the supplies portion of the contract taking into account, among others, the size of the retention money accumulated, its impact on the liquid fund position of the exporter and the past performance regarding the timely receipt of retention money etc.

Advance against Duty Draw Back

Duty Draw Back means refund claim of an importer on customs duties paid by him, for import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials.

Banks may grant post-shipment advances to exporters against their duty drawback entitlements from Customs department, on the basis of export promotion copy of the shipping bill containing the EGM Number issued by the Customs Department, or a provisional certificate issued by Customs Authorities, pending final sanction and payment. The financing bank wherever necessary should make its lien noted with the designated bank and arrangements may be made with the designated bank to transfer funds to the financing bank as and when duty drawback is credited by the Customs.

Advance against Deemed Exports

The supplies made to IBRD/IDA/ADB aided projects are termed as Deemed Exports. Specified sales viz., sales to foreign tourists during their stay in India is also considered termed as deemed export.  Advances against deemed exports are eligible for bank finance, for a maximum period of 30 days.

Advance against export of Goods for Exhibition and Sale

As per RBI guidelines, banks may give finance to exporters against goods sent for exhibition and sale abroad in the normal course in the first instance. After the sale is completed, allow the benefit of the agreed rate of interest on such advances, both at the pre-shipment stage and at the post-shipment stage, up to the predetermined periods, by way of a rebate. Such advances should be given in separate accounts.

How to Liquidate Post-shipment Credit?

Post-shipment credit is to be liquidated by the proceeds of export bills received from abroad in respect of goods exported / services rendered. However, subject to mutual agreement between the exporter and the banker, it can also be repaid /prepaid out of balances in EEFC A/C or from proceeds of any other unfinanced (collection) export bills.