WHAT IS PACKING CREDIT ?
Pre-shipment finance or Packing Credit is a loan/ advance granted to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment.
It is the most commonly used trade finance tool by an exporter which is given by authorized bank by the instruction of Reserve Bank as a government policy to promote exporters to earn foreign currency to strengthen financial status of a country.
Obtaining a packing credit means that all the costs related to manufacturing like working capital, raw materials, labor and machinery costs, transportation, etc. are taken care of.
ELIGIBILITY CRITERIA FOR PACKING CREDIT
- An existing customer already availing credit facilitates
- New units
- The takeover of existing units from other banks/ FIs with a satisfactory track record.
SIGNIFICANCE OF PACKING CREDIT
Packing credit loan is one of the best financial assistance provided by bank to promote the export trade. By availing of Packing Credit, exporters can fulfill their working capital requirements. This equips them to handle the biggest of export orders.
In addition to this, the packing credit is especially very viable for exporters who export goods overseas as it has a more flexible repayment plan than the usual bank loans.
FEATURES OF PACKING CREDIT IN EXPORTS
- Self Liquidation – Packing credit loans have a self liquidating feature since the loan could be liquidated against the final payment of the services and goods or can even be converted to the post-shipment finance after the shipment of the goods. This is very useful for small exporters who don’t have required capital.
- Lower Rate of Interest – The rate of interest charged on packing credit loans is much lower than other types of credit like overdrafts which makes it easy for the exporter to carry out the trade.
- Flexible Terms of Credit – Packing credit loans have exporter friendly terms of credit where the bank permits the exporter to repay the loan after receiving the final payment and resumes to finance all the interim requirements of the exporter.
- Cover Manufacturing Expenses – Packing credit can also be extended as working capital assistance to meet various manufacturing expenses such as wages, cost of raw materials etc. to companies engaged in export or services.
HOW TO OBTAIN PACKING CREDIT ?
In order to obtain packing credit facility, the exporter has to approach their bank with export order. Bank official visits the exporter’s factory and get convinced on the sock of goods and assess the value with export order. The credit is granted on the basis of letter of credit or a confirmed and irrevocable order for the export of goods / services from India or any other evidence of an order for export from India.
Thus, in simple words, Packing credit is a type of finance provided by financial institutions to exporters to make the necessary arrangements for manufacturing the goods for their export orders.