Packing Credit

Packing credit is a pre-shipment credit facility extended by banks to exporters to finance the procurement, processing, manufacturing, packing, and transportation of goods prior to export. In the Indian banking and financial system, packing credit is a vital component of export finance, designed to ensure that exporters have timely access to working capital to execute confirmed export orders. By supporting production and shipment activities, packing credit contributes directly to export competitiveness, foreign exchange earnings, and economic growth.
In an economy like India’s, where exports play a crucial role in balancing external trade and generating employment, packing credit serves as an essential link between the banking system and the export sector.

Concept and meaning of packing credit

Packing credit refers to short-term finance granted to exporters against a confirmed export order or a letter of credit issued by an overseas buyer. The facility is provided before shipment and is intended to cover costs incurred from the stage of order receipt up to shipment of goods.
The credit is typically liquidated from the proceeds of export bills realised after shipment. This structure ensures a close linkage between credit utilisation and export performance, reducing risk for banks while providing liquidity support to exporters.

Objectives of packing credit

The primary objective of packing credit is to enable exporters to fulfil export commitments without facing liquidity constraints. It ensures uninterrupted procurement of raw materials, smooth manufacturing processes, and timely packing and dispatch of goods.
From a policy perspective, packing credit aims to promote exports by offering finance at relatively concessional interest rates, thereby improving price competitiveness of Indian goods in international markets.

Regulatory framework in India

Packing credit in India is governed by guidelines issued by the Reserve Bank of India, which classifies export credit as a priority sector activity. Banks are encouraged to extend timely and adequate export finance in accordance with prescribed norms.
The RBI sets broad parameters relating to eligibility, tenor, interest rates, and reporting requirements, while banks frame operational policies based on internal risk assessment and sectoral exposure.

Types of packing credit

Packing credit may be granted in domestic currency or in foreign currency. <u>Rupee packing credit</u> is extended in Indian rupees and is commonly used by exporters with domestic cost structures. <u>Foreign currency packing credit</u> is provided in currencies such as the US dollar or euro and is suitable for exporters with foreign currency exposure, as it helps mitigate exchange rate risk.
Packing credit can also be classified based on security, including clean packing credit for established exporters and secured packing credit backed by collateral, export orders, or letters of credit.

Role in banking and export finance

For banks, packing credit represents a relatively low-risk lending product, as it is closely tied to specific export transactions. The self-liquidating nature of export credit, combined with regulatory incentives, makes it an attractive avenue for supporting trade finance.
Banks monitor utilisation, shipment timelines, and realisation of export proceeds to ensure that packing credit is used for its intended purpose. Effective monitoring reduces the risk of diversion of funds and delays in repayment.

Importance for exporters and MSMEs

Packing credit is particularly important for micro, small and medium enterprises engaged in export activities. Such firms often face working capital constraints and limited access to alternative financing sources.
By providing liquidity at the pre-shipment stage, packing credit enables MSMEs to accept larger orders, maintain production schedules, and compete effectively in global markets. It also supports employment generation in export-oriented industries.

Impact on the Indian economy

At the macroeconomic level, packing credit supports export growth, which contributes to foreign exchange earnings and improves the balance of payments position. Increased exports stimulate industrial activity, enhance capacity utilisation, and generate employment across manufacturing and allied sectors.
By linking bank credit with actual export transactions, packing credit promotes efficient allocation of financial resources and strengthens the integration of Indian businesses with global trade networks.

Risks and challenges

Despite its benefits, packing credit involves certain risks. Delays in shipment, cancellation of export orders, or failure to realise export proceeds can affect repayment. Exchange rate volatility may also impact exporters, particularly when costs and revenues are denominated in different currencies.
Banks mitigate these risks through careful appraisal of exporters, verification of export orders, insurance cover, and close post-sanction monitoring. Exporters are expected to adhere strictly to shipment schedules and regulatory requirements.