export: how to get post-shipment credit and what exporters need to know

A job that crosses geographic boundaries can be time consuming. In addition, there is uncertainty about the release of payments by the foreign buyer. There have been cases where exporters have had to wait a long time for payments. This interim period can be long enough to have serious repercussions on the working capital cycle of domestic exporters. Most of these players rely on cash payment to keep doing business. A disruption in the money cycle can be a big blow.

The majority of Indian exporters, especially the smaller ones, manage with scarce working capital. Unlike their larger counterparts, these SMEs do not have sufficient financial leeway to overcome such a phase. What are the remedies available to exporters in such cases?

The Ministry of Commerce initiated the concept of post-shipment credit to ease the burden on exporters in such a situation. Post-shipment credit refers to credit given to exporters after the goods have been shipped. This money is intended to help exporters meet working capital needs, such as purchasing raw materials and other business expenses.

The Reserve Bank of India (RBI) defines post-shipment credit as: “Any loan or advance granted or any other credit given by a bank to an exporter of goods / services from India from the date of granting of the credit after shipment of goods / return on services up to the date of export earnings realization and includes any loan or advance given to an exporter, in return for or as security for any duty drawback authorized by the government from time to time .

For obvious reasons, post-shipment credit is extremely beneficial for exporting companies. Besides reducing working capital problems, the mechanism also gives exporters the option of extending the credit period to foreign buyers. A number of financial institutions, including the EXIM Bank of India, major commercial banks, and non-bank financial institutions (NBFCs), provide post-shipment credit to eligible borrowers at a concessional interest rate.

Who is eligible for post-shipment credit?

According to the standards set by the General Directorate of Foreign Trade (DGFT), all types of exporters – including merchant exporters, manufacturer exporters, export houses, trading houses and manufacturers supplying goods to exporters merchants, export houses and trading houses – are eligible to apply. As a rule, the system does not require guarantees from exporters. How then can financial institutions decide on the creditworthiness of an exporter requesting post-shipment credit?

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

Who to contact for credit after shipment?

Currently, nationalized, private and cooperative banks offer this facility as a specialized type of loan. Exim Bank of India – a specialized financial institution mandated to provide financial assistance to exporters and importers – does so too.

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

Exim Bank’s portal indicates that an exporting entity must meet certain criteria in order to get help. First, the applicant must be a proven Indian exporter. The amount of the loan must be within the limits of the maximum authorized bank financing (MPBF) of the borrower’s limit. A margin of approximately 10% for post-shipment credit is applicable. Adequate security may be required in some cases. Typically, the security of this facility includes an appropriate charge on current assets, including export receivables and ECGC coverage.

NBFCs are also mandated to provide post-shipment credit to deserving domestic exporters. NBFCs enjoy a broader reach compared to banks and therefore remain the preferred lender for such loans for many MSMEs based in Tier 2/3 cities.

Documents required for post-shipment credit

Typically, financial institutions, including commercial banks, request certain documents to verify whether export shipments have left domestic shores or not. Common documents used for this purpose are: bill of lading / air waybill, commercial invoice, certificate of origin, inspection certificate, letter of credit, insurance certificate, import and export code certificate and list packing, among others. The lender might also ask for other documents depending on the transaction.

Dos and don’ts of post-export credit

As with any business transaction, there are certain dos and don’ts of obtaining a post-export credit facility. Industry experts say any kind of financing comes at a cost and post-export credit is no different. In addition, a default can damage the reputation of the exporter, sometimes on a global scale.

As all banks require proof of goods being shipped, Walplast’s Thakkar advises exporters to ensure that the exporter’s bank explicitly requests the importer’s bank to have bills of exchange noted and to file a protest in case of non-acceptance / payment.

“Exporters should obtain a buyers credit report from the Export Credit Guarantee Corporation of India (ECGC) before doing business with them. Plus, they shouldn’t change the payment terms after shipment, ”he says. Exporters should also be aware that they can fall victim to unscrupulous activity or piracy, which is quite common these days.

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