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Decoding Packing Credit
Packing credit is a financial arrangement between an exporter and a financial institution. It may be pre-shipment credit or post-shipment credit or both. Pre-shipment credit, as the name suggests, involves financial assistance for procurement of raw materials, their processing into finished goods and packing thereof to make them fit for export. A bank extends post-shipment credit against an export order that has already been made. Packing credit is generally provided for a period of 180 days plus an extension of 90 days.
Packing credit offers many advantages and disadvantages. Some have been elaborated below.
Advantages of Packing Credit
Financial institutions extend packing credit against confirmed export orders or letter of credit issued by the bank of the overseas buyer. Hence, the proceeds of the export orders are firstly utilized in repaying off the loan. It makes the loan totally liquid in its nature as the repayment schedule is inherent in the completion of the export order.
Packing credit comes with great flexibility. Banks can provide funds in the home currency as well as in convertible foreign currency (E.g. Dollar, Pound, and Euro). Financial institutions also allow exporters to repay debts with the proceeds of another export order provided they are commercially exchangeable and the other export order is from the same importing country.
Low Rate of Interest
Every country wants its exports to grow and be more competitive in international markets. It cannot be made possible until finances are available to export houses at a nominal rate of interest. Financial costs are included in the cost of the product. Hence, countries have made policies that allow exporters to take packing credit at a concessional rate that is lower than the prime lending rate.
Funds for Entire Process
Banks extend packing credit for the entire process which includes procurement of raw materials, their conversion into finished goods, storage into warehouses and packaging. In other words, packing credit absorbs all the manufacturing costs and other costs which makes the goods fit for export. Hence it’s a full-time credit which can be expended for any purposes which lead to the export of goods. The quantum of advance is based on the FOB value of the export/letter of credit minus a certain margin.
For Service Providers Too
Banks do not limit the availability of packing credit to the exporter of goods only. Even an exporter of service needs finance before supplying his services. It may require funds in the form of cost of training personnel, procuring additional input services and goods necessary for delivering export services, etc. Hence a service provider can also avail packing credit.
Disadvantages of Packing Credit
Extensive Pre Sanction Review
Banks perform an extensive pre-sanction review on the exporter as well as on the importer. They assess from the past records whether the exporter is bonafide and it has the required license to export or not etc. They further evaluate other parameters like product’s profitability, importing country’s stability (both politically and economically). The whole process turns out to be very tedious for the borrower at times.
Taking an advance is relatively easier than complying with the follow-up conditions. Financial lenders ask for stringent compliance like submission of regular stock statements, physical verification of stock and status reports. Such regular compliance adds on to administrative burden on the borrower and disrupts normal operations.
Dependence on LC
The whole mechanism of packing credit relies on the letter of credit issued by the banker of the importer. It sometimes turns out that the bankers are not ready to offer a letter of credit to new importers. Thus, if any bonafide importer fails to get the letter of credit from his bank then this whole process will fail.
Financial institutions provide packing credit generally for a period of 180 days plus a one-time extension of 90 days. Under the credit period, the bank assumes that the exporter would be able to realize his export proceeds and repay his debts to the bank. However, under many external circumstances, the exporter fails to do so. Thus, the exporter has to repay the loan with a penal interest rate.
Although packing credit is easily available to the seller/exporter, there is a problem of complying with strict provisions too. The seller can avail finance easily and meet his further production needs. But this process of availing credit requires regular verification of reports and statements also. In a nutshell, the seller must take into consideration all the disadvantages involved before procurement of credit from the institution.1