Pre-shipment Credit / Finance

Pre-shipment credit, also known as pre-shipment finance, refers to the working capital finance extended by banks to exporters before the shipment of goods. It is provided to finance the procurement of raw materials, processing, manufacturing, packing, and transportation of goods meant for export. In banking, finance, and particularly in the Indian economy, pre-shipment credit plays a crucial role in supporting export activity, improving liquidity for exporters, and enhancing the global competitiveness of Indian goods.
Exports often involve long production and processing cycles. Pre-shipment finance ensures that exporters are not constrained by lack of funds during the pre-export stage.

Concept and Meaning of Pre-shipment Credit

Pre-shipment credit is a short-term loan granted by banks to exporters for meeting expenses incurred prior to the shipment of goods. The finance is extended against a confirmed export order or an irrevocable letter of credit, ensuring that the credit is backed by a genuine export transaction.
The credit is typically adjusted or liquidated out of the proceeds of the export bill once the goods are shipped and payment is realised.

Objectives of Pre-shipment Finance

The primary objectives of pre-shipment credit are:

• To provide working capital to exporters during the production stage
• To facilitate smooth execution of export orders
• To enhance export competitiveness by ensuring timely availability of funds
• To promote export growth and foreign exchange earnings

By easing liquidity constraints, pre-shipment credit supports uninterrupted export operations.

Forms of Pre-shipment Credit

Pre-shipment finance may be provided in different forms depending on the nature of export activity:

• Packing credit, which is the most common form and is used for purchasing, processing, packing, and transporting goods
• Advances against export orders, granted on the basis of confirmed export contracts
• Advances against letters of credit, where finance is backed by an LC issued by an overseas buyer

Packing credit is widely used and is often synonymous with pre-shipment credit in banking practice.

Pre-shipment Credit in Foreign Currency

In India, exporters may avail pre-shipment credit in foreign currency, commonly known as Packing Credit in Foreign Currency. This facility allows exporters to borrow at international interest rates, reducing the cost of finance and improving price competitiveness in global markets.
Foreign currency pre-shipment credit also helps exporters hedge against exchange rate fluctuations to some extent.

Role of Banks in Pre-shipment Finance

Banks play a central role in providing pre-shipment credit by appraising export orders, assessing creditworthiness of exporters, and monitoring end-use of funds. They ensure that the finance is utilised strictly for export-related activities.
Pre-shipment credit forms a key component of banks’ trade finance operations and contributes to both interest income and support for national export objectives.

Regulatory Framework in India

In India, pre-shipment credit is regulated by guidelines issued by the Reserve Bank of India, which prescribes norms regarding eligibility, interest rates, tenure, and reporting requirements.
Export credit is treated as priority sector lending, reflecting its importance in promoting exports and earning foreign exchange. RBI guidelines aim to balance export promotion with prudent credit risk management.

Interest Rates and Tenure

Pre-shipment credit is generally extended at concessional interest rates compared to domestic working capital loans. The tenure of such credit usually covers the production and shipment cycle, typically up to 180 days, with extensions allowed in specific cases.
Lower cost of credit improves exporters’ cost efficiency and global competitiveness.

Importance for the Indian Economy

Pre-shipment finance plays a vital role in India’s export-led growth strategy. By ensuring uninterrupted production and timely shipment, it helps exporters meet international demand and delivery schedules.
Increased export activity contributes to foreign exchange earnings, improves the balance of payments position, and supports overall economic growth.

Risk Management in Pre-shipment Credit

Banks face risks such as cancellation of export orders, production delays, and default by exporters. To mitigate these risks, banks rely on export orders, letters of credit, insurance coverage, and close monitoring of export transactions.
Effective risk management ensures sustainability of pre-shipment finance while maintaining asset quality.

Advantages of Pre-shipment Credit

Pre-shipment finance offers several advantages:

• Adequate working capital for exporters
• Lower cost of funds due to concessional rates
• Improved ability to execute export orders on time
• Support for small and medium exporters