Post-shipment finance is a special credit or loan given to exporters by banks against a shipment of goods sent to overseas buyers.
Since exporters don’t wait for importers to deposit funds against the large-scale shipment, they often seek assistance as post-shipment finance and realization options in export proceeds.
Usually, post-shipment finance options are sanctioned from the date of offering the credit after the shipment to the date of realization of the exporter proceeds.
Essentially, there are three types of exports for which different types of post-shipment finance is offered to exporters:
Physical Export:
Under physical export, finance is offered to the actual exporter whose name is mentioned in the trade documents.
Deemed Export:
Under Deemed exports, finance is sanctioned to the exporter of goods supplied to the respective agencies.
Capital Goods and Project Export:
Under capital goods and project export, finance can be extended in the name of the overseas buyer, but the money is disbursed directly to the domestic exporter.
Now let us look at some popular post-shipment financing and realization options:
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1. Purchased/discounted export bills
Purchased/discounted export bills are used in indisputable international trade transactions for sale contract/order by banks. In case of such bills, the bank is accountable for granting a specific limit to exporters to facilitate the purchase of export bills.
2. Secure extended finance for export bills negotiated
As the issuing bank regulates the payment under LC (Letter of Credit), the payment-related risk for the exporter is less in this post-shipment finance option. The risk potential is further reduced as the bank confirms the LC and guarantees the remittance. This is a secure method wherein banks are willing to extend the finance for bills due to the availability of LC.
However, this method can still result in risk scenarios on the bank’s side in two situations:
The exporter is a non-performer and is unable to abide by all the terms and conditions. The issuing bank does not consider the LC in this case.
There is a documentation risk where the issuing bank chooses to dishonor its commitment.
To avoid such a high-risk situation, it is critical for the negotiating and lending bank to check all the legal documents thoroughly before submission.
3. Advance against export bills for Collection
If discrepancies are found in the bills under LC, it is mandatory to send the bills for collection. For instance, if an exporter refuses to discount/purchase export bills, they would arrange to send export bills on a collection basis, considering the standard foreign currency exchange.
In this scenario, banks may lend some portion of export bills to the exporter as an advance against collection bills with a concessional interest rate.
This is decided based on the transit period in case of DP (Documents against Payments) bills, which is calculated right from the date of acceptance of the export documents for collection at the bank.
Once the export bills are realized from overseas buyers, the amount is credited as post-shipment credit.
If the realization of the amount from an overseas buyer does not happen in the stipulated period, the bank reserves the right to crystallize pending export bills and levy a commercial rate of interest that is equivalent to the advance amount.
4. Finance against export on a consignment basis
A bank can also finance an exporter when goods are sent as a consignment for sale at the exporter’s risk, and the consignee initiates the final payment against the sale to the exporter. The role of the bank, in this case, is to advise its overseas counterpart to issue the document only against the undertaking that sale proceeds be delivered by the specified date. This is strictly practiced even when certain trades allow the bill for the partial estimated value against the exports to be drawn in advance.
In the case of trade that uses Indian-owned overseas warehouses, the ideal realization time limit is 15 months.
5. Finance against the undrawn balance
To avoid certain complexities and trade disputes, a small part of the payment is left undrawn for final adjustments towards differences in exchange rates, consignment weight, quality factors, etc. In some cases, banks provide post-shipment finance against the undrawn balance, provided the balance conforms to the normal level of undrawn balance (which usually equals 10 percent of the maximum export value).
To ensure transparency and minimize risk, an exporter is also expected to submit an undertaking that they will fulfill the balance proceeds of the shipment within six months from either the due date of payment or the date of shipment, whichever is earlier.
6. Advance against Claims of Duty Drawback
Duty drawback is disbursed by the government’s customs department as a kind of support to exporters in their country after submission of export documents with customs authorities. The bank lends finance against such duty drawback receivable from customs after the exporter submits all the essential export documents with their bank to confirm eligibility. This the amount is given when the in-house production cost is higher than the international price. Finance of this type helps exporters survive in the global market.
As soon as the shipment is made, any claims lodged by exporters with supporting export documents are processed carefully. After satisfactorily meeting eligibility criteria and making sure that the bank holds the right to receive the loaned amount directly from respective government authorities, the bank sanctions the advance amount against duty drawback. The advance is offered at a lower rate of interest for 90 days. These days, the customs of the department does not take too long to disburse duty drawback if all documents are found perfectly in order.
It may be noted that finance is granted to an exporter only when the same bank extends other export finances to the exporter.
The Crystallization of Overdue Export Bills
If an export bill purchased/negotiated/discounted is not realized until the due date, foreign exchange for the exporter is converted into rupee liability.
In case of unpaid DP bills, the rupee conversion takes place on the 30th day after the expiry of the NTP (Normal Transit Period). In the case of DA (Documents against Acceptance) bills, the liability is converted on the 30th day after the national due date.
The exchange conversion rate is the current TT (Telegraphic Transfer) selling rate or the original bill buying rate on the day of crystallization, whichever is higher.
Conclusion
Mentioned above are the prevalent post-shipment finance and realization options currently available to exporters. Due to ongoing changes and frequent updates introduced by the government, documents, and bank-approved loans and overseas export affairs, these credit options are likely to change. So, it is essential to stay informed of any new rules that may be implemented.
