Advantages and Disadvantages of Packing Credit

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. As the name suggests, pre-shipment credit involves financial assistance for the 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 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. Let us see them below.

Advantages of Packing Credit

Easy Repayment

Financial institutions extend packing credit against confirmed export orders or letters of credit issued by the bank of the overseas buyer. Hence, the proceeds of the export orders are firstly utilized in repaying the loan. It makes the loan totally liquid in its nature as the repayment schedule is inherent in the completion of the export order.

Flexibility

Packing credit comes with great flexibility. Banks can provide funds in the home currency and convertible foreign currency (E.g., Dollar, Pound, and Euro). Financial institutions also allow exporters to repay debts with the proceeds of another export order. 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 interest rate. 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, including the procurement of raw materials, their conversion into finished goods, storage in warehouses, and packaging. In other words, packing credit absorbs all the manufacturing costs and other costs, making the goods fit for export.  Hence it’s a full-time credit that can be expended for any purpose, which leads 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 the cost of training personnel, procuring additional input services and goods necessary for delivering export services, etc. Hence a service provider can also avail of packing credit.

Disadvantages of Packing Credit

Extensive Pre Sanction Review

Banks perform an extensive pre-sanction review on the exporter and 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 and importing country’s stability (both politically and economically). The whole process turns out to be very tedious for the borrower at times.

Stringent Compliance

Taking an advance is relatively easier than complying with the follow-up conditions. Financial lenders ask for stringent compliance like submitting regular stock statements, physical verification of stock, and status reports. Such regular compliance adds on to the 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 importer’s banker. 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 their bank, then this whole process will fail.

Fixed Tenure

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.

Conclusion

Although packing credit is easily available to the seller/exporter, there is a problem with complying with strict provisions too. The seller can avail of finance easily and meet his further production needs. But this process of availing credit also requires regular verification of reports and statements. In a nutshell, the seller must consider all the disadvantages involved before procurement of credit from the institution.