Exports are critical to India’s economic development, generating foreign exchange revenues, manufacturing output, and employment. In modern times, financial institutions offer tailored financing options designed to satisfy pre-shipment working capital demands assuring effective execution of export orders. Packing Credit is a credit facility that offers financial resources required to produce and ship goods to customers internationally.
Meaning of Packing Credit
Packing Credit/Pre-shipment Finance, is a short-term working capital loan granted to export businesses by financial institutions to fuel their export needs. It helps them to fulfil working capital demands for the time between the receipt of an export order and the actual shipment of goods. The authorisation is received post receipt of export order from a foreign buyer and later adjusted once export proceeds are realized.
The RBI issues Master Directions governing packing credit facilities in accordance with the Foreign Exchange Management Act 1999. Additionally, organizations such as the EXIM bank and the Export Credit Guarantee Corporation of India (ECGC) aids with credit insurance and refinancing to businesses.
Example of Packing Credit
For instance, a purchaser places an export order with XYZ handicrafts for handmade furniture worth 10,000 USD. As per estimates, it may take around Rs. 40L for covering production costs. XYZ handicrafts decides to avail packing credit from a financial institution and applies for the same with necessary paperwork. After assessing the application, the lending institution approves a 40L loan at 6.5% interest for 100 days. Once the payments are received, the XYZ handicrafts repays the lender.
Need for Packing Credit
Features of Packing Credit
Financing Type –
It is a temporary financing facility provided against export orders or letters of credit (LC). It can be either in the form of cash credit, loan, overdraft, bill discounting.
Short-Term Nature–
The financing facility could be availed for six months to one year in special cases depending upon the bank’s approval.
Reasonable Interest Rate–
Banks and other financial organizations offer packing credit at reasonable interest rates, which attracts exporters.
Collateral Requirement-
Repayment can be secured through export orders, letters of credit, collateral, or guarantees.
Flexible Repayment Terms-
Packing credit facilities allow exporters to repay funds in easier installments on a predetermined schedule.
Self-Liquidation-
It is the most unique feature of Packing Credit. Upon realization of payments, the advance is automatically liquidated through the export proceeds. Thus, there is no need for a distinct source of repayment to extinguish the loan liability.
Types of Packing credit
Secured Packing Loan-
A Secured Packing Credit is backed by tangible security, such as goods in stock, raw materials, investments, real estate or guarantees. This type of financing is normally granted to new or medium-risk exporters.
Unsecured Packing Loan-
Unsecured Packing loan is provided to well-established exporters with a proven track record of achievement and solid financial position. Such credit is typically supported only by export documentation and does not require any further physical collateral.
Packing Credit in Foreign Currency (PCFC)–
Pre-shipment loans in requisite foreign currency help exporters manage production and export costs. It is advantageous in overseas transactions as it gives funds in the currency relevant to the export transaction.The rate of interest could be very attractive compared to domestic business loan rates. The loan tenure can go up to 180 days and can be extended until 360 days in certain cases, with RBI approval.
Advance against Letter of Credit-
This method of financing entails leveraging a letter of credit from the buyer’s bank. Financial institutions offer funds based on the L/C as collateral which assures exporters have adequate working capital to fulfil export needs.
Green or Red Letter of Credit-
Green and Red Letters of Credit indicate different levels of compliance with defined terms. A Red Letter of Credit shows inconsistencies that needed to be addressed before funds disbursal, whereas a Green Letter of Credit exhibits compliance. Color coding makes it easier to process export paperwork and make payments.
Advances against Duty Drawbacks-
Exporters can seek credit against duty drawbacks or refunds which exporters are eligible owing to export of goods. Duty Drawbacks could be leveraged to act as collateral to secure financing.
Advances against export incentives-
Government grants and subsidies are instances of export incentives that can be used as collateral to secure pre-shipment financing. It enables exporters to access funds based on the incentives they are eligible to obtain upon fulfilment of export.
Packing Credit against entitlements under Advance License (Imports)-
This entails getting packaging credit in accordance with the rights allowed by the advance license. It permits the duty-free import of raw materials for export manufacturing. Exporters can utilize funds under this category to meet pre-shipment costs before fulfilling the license’s export requirements.
Advantages of Packing Credit
Ensures Sufficient Working Capital-
Packing credit enables access to resources necessary to purchase raw materials and cover labor, packaging, and shipping expenses prior to shipment. It assures that exporters never face liquidity issues while fulfilling export orders.
Financing offered at concessional rates-
Banks offer packing credit at cheaper interest rates than standard business loans. The Reserve Bank of India (RBI) imposes affordable interest rates to stimulate exports, minimizing exporters’ financing costs.
Faster and Efficient Execution of Orders-
Packing credit facilitates exporters to guarantee timely goods delivery through essential financial support. It also helps to build reputation and enhance credibility globally.
Improves Export Competitiveness-
Indian goods are more competitively priced in international markets due to lower finance costs and prompt fund availability. This aids exporters in gaining more contracts abroad and increasing their worldwide footprint.
Enhances Cash Flow Management-
Packing credit helps maintain a consistent cash flow for the exporter by bridging the gap between receipt of order and payment realization.
Nurture Business Relationships-
Exporters who consistently avail packing credit have a solid credit history and trust with their lender, which can facilitate easier access to additional financial resources down the road.
Eligibility Criteria
- Copy of Certified Importer Exporter Code (IEC) granted by the Directorate General of Foreign Trade (DGFT).
- Copy of verified Letter of Credit or Export Order (L/C);
- Exporters should be classified as manufacturers, merchants, export-oriented units (EOU), or SEZ units.
- The exporter should not be on the RBI or Export Guarantee Credit Corporation (ECGC) caution or defaulters’ lists.
- The exporter’s credit and banking records must be adequate.
- The credit must only be utilized to carry out the particular export order.
How does packing credit work?
- Receipt of export order – A foreign buyer first provides the exporter with a secured export order or a letter of credit (L/C). It acts as the proof of a genuine transaction.
- Application and processing– Exporters send an export order to their selected bank to request monies through the credit facility. The value of the export order is ascertained by a bank executive office visiting the company after the request has been processed.
- Fund disbursement- Depending on the risk assessment, the bank grants credit for all or part of the invoice’s value. If both the exporter and the bank agree, the payment may be made in either Indian or foreign currency that could be easily converted.
- Utilization of funds- Exporters use funds for raw material procurement, processing, manufacturing, and packing to prepare items for export.
- Repayment and closure- The bank clears the packaging credit account after the seller gets payment from the foreign buyer. By doing this, the facility is closed and the loan is repaid.
Process
Here is a step by step guide to availing a packing credit from any bank, for the exporters.
Get a Confirmed Export Order or Letter of Credit (L/C) from Buyer
The exporter first obtains a confirmed export order from a foreign buyer or an irrevocable L/C issued by the buyer’s bank. It is the primary document sought by the lender to initiate the process.
File a Packing Credit Loan Application
Once the buyer approves the export order, the exporter shall formally place a request for packing credit with the lender.
Submit Essential Paperwork and Undergo a Verification Process
The exporter business will submit essential paperwork including PAN details of the business, export order, IEC certificate, and financial statements. After assessing the genuineness of these documents, the bank will decide a suitable credit limit. The credit limit usually lies between 20 -25 percent of the exporter’s yearly sales.
Set up Order-Specific Lending Accounts.
When there are several export orders, the bank opens distinct credit accounts pursuant to each export order. Interest begins to accrue after the funds are approved.
Payment Disbursal in Phases
In accordance with the exporter’s production or shipping requirements, the bank could demand a breakdown of expenses and release the authorized credit amount gradually in a phased manner.
Shipment and Adjustment of Packing Credit
After goods are shipped, the exporter submits shipping documents (invoice, bill of lading, packing list, etc.) to the bank. The packing credit loan is either repaid from export proceeds or converted into post-shipment credit until export payments are received.
Account Closure
After the export proceeds are received, the bank settles the packing credit loan and closes the account.
Difference between Packing Credit and Letter of Credit
Basis of Difference |
Packing Credit |
Letter of Credit (LC) |
| Meaning | A bank provides an interim pre-shipment loan to exporting businesses to finance the acquisition, preparation, or shipping of goods intended for export. | Letter of credit acts as a payment guarantee from an importer’s bank that guarantees the exporter will be paid after the export paperwork is received in line with the conditions of the agreement. |
| Stage of Export | Pre-shipment phase (before the goods are transported). | Post-shipping phase (to ensure payment after dispatch of goods). |
| Repayment/Adjustment | Adjusted from export revenues or converted to post-shipment financing. | After receiving conforming documentation, the issuing bank pays the exporter. |
| Risk Coverage | minimizes the exporter’s financial risk prior to shipment. | lowers supply risk for importers and payment risk for exporters. |
| Issued/Granted By | The exporter’s bank. | The importer’s bank (in favor of the exporter). |
Conclusion
Packing Credit is the backbone of India’s export financing environment, guaranteeing exporters have the finances to fulfil orders on schedule. Access to flexible and discounted financing facilities enhances India’s export competitiveness and fortifies its standing in international trade. As India’s export base expands, simplifying access to packing access especially for MSMEs is critical for long-term export growth.
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FAQs
What is packing credit?
Packing Credit/Pre-shipment Finance, is a short-term working capital loan granted to export businesses by financial institutions to fuel their export needs.
Who can avail packing credit?
Any business/SME/exporter, with a valid Importer Exporter Code (IEC) and a confirmed export order from a foreign buyer or an irrevocable L/C issued by the buyer’s bank can avail packing credit.
What is Packing Credit in Foreign Currency (PCFC)?
Packing Credit in Foreign Currency (PCFC) is a pre-shipment loan offered in foreign currency. This helps exporters reduce currency risks.
How to repay packing credit?
One of the main features of the packing credit is that it is self-liquidating and repaid from export proceeds once the foreign buyer settles the payment.
Is there a need for collateral in availing packing credit?
Yes, it may be needed. Repayment can be secured through export orders, letters of credit, collateral, or guarantees.
What is the credit limit for the packing credit?
The credit limit usually lies between 20% -25% of the exporter’s yearly sales.
What is the repayment period of the packing credit?
Packing credit is generally available for up to 180 days, extendable to 360 days in special cases based on bank approval.
Can an exporter get Packing Credit for multiple orders?
Yes. Banks usually open separate packing credit accounts for each export order to ensure order-wise monitoring.
Can a first-time exporter apply for Packing Credit?
Yes, but banks require evidence of export readiness—such as production capability, supplier arrangements, export knowledge, and adherence to compliance norms. Joining EPCs and completing export-training programs helps.