Pre-shipment Credit in Foreign Currency (PCFC)
Pre-shipment Credit in Foreign Currency (PCFC)
When an advance or a loan is granted, or another form of credit is provided by a bank to an exporter to finance the purchase, processing, manufacturing, or packaging of goods before a shipment is called a pre-shipment credit. To provide access to credit to exporters at internationally competitive rates, authorized dealers have a permit to offer Pre-shipment Credit in Foreign Currency to exporters for domestic and imported inputs of exported goods. This article discusses the process and details concerning Pre-Shipment Credit in Foreign Currency (PCFC).
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Overview
A bank may offer an advance on the amount required, called a pre-shipment credit, for financing activities related to export and import. This credit is being provided to an exporter based on the Letter of Credit issued in the exporter’s name or a person related to the exporter’s business. The Letter is required to be released by an overseas buyer or an irrevocable or confirmed order for the export of goods from India. Any form of evidence of an order for shipping from the country stating that an order has been placed from the exporter or specific person is accepted as a Letter of Credit by a bank.
Exporters in India have two primary options:
- To avail pre-shipment credit in the form of foreign currency and cut down on the export bills in foreign Currency at the post-shipment stage.
- To avail finance for export at a pre-shipment stage in Indian Rupees. Post-shipment credit may be satisfied in Indian Rupee or a preferred foreign currency.
Authorized dealers can extend Pre-shipment Credit in Foreign Currency (PCFC) to exporters dealing with domestic and imported inputs of exported goods. To make this line of credit valid to exporters at internationally competitive rates, the pre-shipment credit is offered at LIBOR/ EURO or LIBOR/EURIBOR-related interest rates.
Credit Currency
The Reserve Bank of India has granted permission to offer pre-shipment credit in convertible currencies. However, at present, the Pre-shipment Credit in Foreign Currency is given in U.S. Dollars, EURO, and GBP, subject to the availability of funds. Pre-shipment may be extended in a convertible currency regardless of which Currency the export order is invoiced. Although, this may come off as a risk and cost of cross-currency transactions to the exporter.
For example, an exporter may choose to avail PCFC in Euro against an export order invoiced initially in U.S. Dollars. The cost of cross-currency transactions and the related risks will be at the exporter’s expense. Pre-shipment in Foreign Currency is also extended to exporters in the Asian Clearing Union countries.
Operational Guidelines
Pre-shipment credit in Foreign Currency (PCFC) is accessible to exporters at the ‘A’ category branches and designated ‘B’ category branches of a bank for operational convenience. All banks’ ‘C’ category branches are not permitted to control the PCFC facility in their books. They must mandatorily route all their PCFC transactions through a designated ‘B’ or an ‘A’ category branch. However, all ‘C’ category branches must keep a dummy ledger account of the amounts drawn and adjusted in their books and report the same as a footnote in the W-1 statement to the Regional Officer.
The following aspects are kept in view when an authorized bank branch considers the request for a PCFC.
- Pre-shipment Credit in Foreign Currency must be extended to Standard Accounts.
- Exporters requesting PCFC should have a satisfactory track record regarding the conduct of export business.
- Situations that require the liquidation of pre-shipment credit in another manner should be exceptional and within valid reasons.
- Except for genuine cases, the track record concerned with the realization of export bills on the due dates should be satisfactory, and the accounts must not remain overdue.
- PCFC may be granted for deemed exporters for the supply to projects financed by multilateral/ bilateral agencies/ funds under the usual terms and conditions that govern the Rupee credit for deemed exports. At a post-shipment stage, the distinction is restricted to 30 days or up to the date of payment by the concerned authorities, whichever is earlier.
- Details of the contract/ Letter of Credit that are submitted.
- Study the amounts for remittance against import bills and those to be converted into Indian Rupees, i.e., break up of utilization.
Documents Required
A bank branch to approve a PCFC in the name of a particular exporter must obtain the necessary documents. The branch must receive a request letter from the customer of the exporter. This request letter must be in the prescribed format mentioned in Annexure 5(1). The Security documents taken for Rupee Packing Credit should be received for approving PCFC. However, a Demand Promissory Note must be obtained in the required Foreign Currency.
Credit Limits
The Export Limits (P.C. and FDB) would be sanctioned in both the Indian Currency and the Foreign Currency. The assessment would be completed based on the Indian Currency on a working capital cycle that includes pre-shipment and post-shipment as the existing methods. The Foreign currency version of the assessment would be worked out based on the latest FEDAI rate.
Once the Foreign Currency assessment is completed, as mentioned above, the PCFC/ FDBD outstanding would be controlled in Foreign Currency.
Period of Credit
Pre-shipment Credit in Foreign Currency (PCFC), in the case of the Indian Rupee, is available for a specific period initially as decided by the sanctioning authority. This is determined based on various relevant factors. A maximum period of 180 days is permitted, and the branch monitors the end use of the credit in the case of Rupee credit. It should be ensured that advances granted under the PCFC Scheme are diverted for any other domestic purpose.
Rate of Interest
The existing LIBOR/ EURO or LIBOR/ EURIBOR rates would influence the interest rate on PCFC according to the appropriate period at the time of the advance, along with the sanctioned spread. These rates are usually accessible for 1, 2, 3, 6, and 12 months. The B-category branches of banks have to disburse the PCFC at a rate obtained for the Treasury Branch in Mumbai.
The rate of interest may vary according to the movement of LIBOR. Therefore, the rate may differ for each withdrawal. Interest would be charged on PCFC at the rate fixed at the time of disbursal. For earlier outstanding loans, the interest rate would be the rate that was initially set at the time of withdrawal. A bank may avail of a line of credit from another bank situated abroad to fund PCFC. In such situations, the withholding tax payable by the bank must be passed on to the exporter who is availing of the credit.
Note: The applicable benefit to the customer will only accrue after the realization of the export bills or when the resultant export bills are rediscounted without any recourse basis.
Amount of Credit
The amounts of credit advanced under Pre-shipment in Foreign Currency are restricted to a minimum of US$ 10,000/-.
Expiry of Contracts/ Letters
The Head of a bank’s branch may grant extensions up to 180 days on the written request of the exporter under the condition that the underlying Letter of Credit/ order is valid. If a bank incurs extra costs in funding the extension, the exporter is liable to pay them. However, no profits from the transaction would be passed on to the exporter.
After the approval of the Regional Office, an extension beyond 180 days and up to 270 days may be granted by the branch subject to the export contract/ Letter of Credit is still valid for the extended period. An extension above 270 days up to a maximum of 360 days may be granted to an exporter only under particular circumstances and after approval from the Regional Office. For this, the export contract or the Letter of Credit has to be valid for shipment. The interest rate on PCFC for the period beyond 180 days would be the prevailing interest rate with an additional 2 percent.
If no export is done within 360 days, the PCFC should be adjusted at the T.T. selling rate. When an export order is canceled, the PCFC should be liquidated by selling the equivalent amount of foreign exchange at the T.T. selling rate prevailing on the date of liquidation, and the interest recovered on the Rupee equivalent of the principal amount at the Packing Credit rate adjusted not in an approved manner with an addition of 0.125 percent commission.
A bank branch must ensure that the reason for the adjustment of PCFC with the Rupee funds is genuine. Rupee Packing Credit would not be granted again against such export orders.
