5. PRE & POST SHIPMENT CREDIT , CONCEPT ON NOSTRO ACCOUNT & FEW QUESTIONS BASED ON SHIPMENT
Pre-Shipment and Post-Shipment Credit :
Pre- Shipment Credit: Pre-shipment / Packing Credit also known as ‘Packing credit’ is a loan/ advance granted to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment.
Packing credit can also be extended as working capital assistance to meet expenses such as wages, utility payments, travel expenses etc; to companies engaged in export or services.
Packing credit is sanctioned/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.
Post Shipment Credit: 'Post-shipment Credit' means any loan or advance granted or any other credit provided by a bank to an exporter of goods / services from India from the date of extending credit after shipment of goods / rendering of services to the date of realisation of export proceeds as per the period of realization prescribed by Reserve Bank of India (RBI) and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time.
As per extant guidelines of RBI, the period prescribed for realisation of export proceeds is 12 months from the date of shipment.
Nostro Account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions.
Rules for any Mode of Transport: EXW – Ex Works (named place of delivery) FCA – Free Carrier (named place of delivery) CPT – Carriage Paid To (named place of destination) CIP – Carriage and Insurance Paid to (named place of destination) DAT – Delivered At Terminal (named terminal at port or place of destination) DAP – Delivered At Place (named place of destination) DDP – Delivered Duty Paid (named place of destination)
Rules for Sea and Inland Waterway Transport: FOB – Free on Board (named port of shipment) CFR – Cost and Freight (named port of destination) CIF – Cost, Insurance & Freight (named port of destination) Shipment Based Questions :
1. An exporter approaches the ABC Bank for pre-shipment and post-shipment loan with estimated sales of Rs. 500 lakh. The bank sanctions a limit of Rs. 200 lakh, with 30 % margin for pre-shipment loan on FOB value and margins on bills of 15 % on foreign demand bills and 20 % on foreign usance bills. The firm gets an order for USD 60,000 (CIF) to Australia. On 1.1.2015 when the USD/INR rate was Rs.65.50 per USD, the firm approached the Bank for releasing pre-shipment loan (PCL), which is released . On 31.5.2015, the firm submitted export documents,drawn on sight basis for USD 30,000 as full and final shipment. The bank purchased the documents at Rs.65.85, adjusted the PCL outstanding and credited the balance amount to the firm's account, after recovering interest for Normal Transit Period (NTP). The documents were realized on 30.6.2015 after deduction of foreign bank charges of USD 350. The bank adjusted the outstanding post shipment advance against the bill. Bank charged interest for pre-shipment loan @ 6 % up to 90 days and, @ 7 % over 90 days up to 180 days. For Post shipment credit the Bank charged interest @ 8 % for demand bills and @ 8.5 % for usance (D/A) documents up to 90 days and @ 9.50 % thereafter and on all overdues interest @ 12%.
01. What is the amount that the Bank can allow as PCL to the exporter against the given export order, considering the profit margin of 5% and insurance and freight cost of 10% ? a. 2352105 b. 3360150 c. 3537000 d. 3930000 Ans - a Explanation : FOB value = 60000 x 65.50 = 3930000 — 393000 (10 % of 3930000 (insurance and freight cost)) = 3537000 — 176850 (5 % profit margin) = 3360150 - 1008045 (30% margin) = 2352105 So, the Bank can allow Rs. 2352105 as PCL to the exporter against the given export order.
02. What is the amount of post shipment advance that can be allowed by the Bank under foreign bills purchased, for the bill submitted by the exporter? a. 3360150 b. 2352105 c. 1975500 d. 1750500 Ans - c Explanation : 30000 x 65.85 = 1975500 So, the Bank can allow Rs. 1975500 as post shipment advance under foreign bills purchased, for the bill submitted by the exporter.
03. In the above case, when should the bill be crystallized (latest date), if the bill remains unrealised for over two months, from the date of purchase (ignore holidays)? a. 24.06.2015 b. 25.06.2015 c. 24.07.2015 d. 25.07.2015 Ans - c Explanation : Crystallisation will be done when the bill becomes overdue after 25 days of normal transit period. Date of overdue will be 25.6.2015. If bill remains overdue, it will be crystallised within 30 days i.e. up to 24.7.2015.
04. What rate of interest will be applicable for charging interest on the export bill at the time of realisation, for the days beyond Normal Due Date (NDD)? a. 8.50% b. 9.5 % c. 10 % d. 12 % Ans - c Explanation : Rate of interest will be 12% as the overdue interest is stated as 12%