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How does banks finance pre-shipment loans to exporters

Updated: Mar 31


Pre-shipment loans are loans given to exporters by banks for expenses related to manufacturing, processing, and packing goods before shipment. The period of the loan is based on individual exporter circumstances, and the loan must be repaid once the overseas buyer pays the exporter's bill against the export of goods. Banks may release the loan in a lump sum or in stages, and maintain separate accounts to monitor the period of the loan and its use. The exporter must submit necessary export documents immediately upon each shipment taking place, and the commercial interest rate is charged from the date of disbursement of the loan.

Hi guys, today we're going to talk about pre-shipment loans, which are advances or loans extended by a bank to exporters for the purpose of manufacturing, procuring, processing or packing goods before shipment. Here are ten key points to keep in mind about pre-shipment loans:

  1. Pre-shipment finance is given as working capital expenses towards services on the basis of LC (letter of credit) in favor of the exporter or in favor of some other person by the overseas buyer or his behalf or any other evidence.

  2. The period of pre-shipment finance is determined by the bank based on the individual circumstances of each exporter. Each exporter requires pre-shipment finance based on their nature of requirements such as time for procuring export goods, processing or manufacturing, and shipping.

  3. Once the exporter obtains pre-shipment finance from the bank, they must submit the necessary export documents with the bank immediately upon each shipment taking place.

  4. Once the overseas buyer pays the exporter's bill against the export of goods, the bank adjusts the realized amount with the pre-shipment loan already provided to the exporter.

  5. As per bank guidelines, exporters are required to submit export documents with the bank after export takes place. If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for the prescribed rate of interest for export credit to the exporter.

  6. The commercial interest rate is charged from the date of disbursement of pre-shipment finance.

  7. Refinance is provided by the Reserve Bank for a maximum period of 180 days with permission.

  8. Banks may release pre-shipment finance either in a lump sum or in stages based on the requirements of the exporter with satisfaction by the bank against execution of the export order.

  9. Banks maintain separate accounts for packing credit/pre-shipment finance to monitor the period of sanction of such pre-shipment loan and the end use of the amount.

  10. The various stages of processing and manufacturing are monitored by banks by maintaining a separate account to ensure that the outstanding balance in accounts is adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount, etc. The major threat of the bank is to monitor from time to time on the progress of fulfillment of export orders by exporters. Exporters are required to update with the bank on the changes or amendment in export orders on the addition or deletion of export orders.

I hope this helps!

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