Post Shipment Finance is a kind of financial assistance provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds.
Post-Shipment finance can be classified as:
- Export Bills purchased/discounted.
- Export Bills negotiated
- Advance against export bills sent on collection basis.
- Advance against export on a consignment basis
- Advance against the undrawn balance on exports
- Advance against claims of Duty Drawback.
Export Bills Purchased/ Discounted. (DP & DA Bills)
Export bills (Non-L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility.
Export Bills Negotiated (Bill under L/C)
The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC.
However, this arises two major risk factors for the banks:
- The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit.
- The bank also faces the documentary risk where the issuing bank refuses to honor its commitment. So, it is important for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.
Advance against Export Bills Sent on Collection Basis
Bills can only be sent on collection basis if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency.
Banks may allow advance against these collection bills to an exporter with a concessional rate of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill.
The transit period is from the date of acceptance of the export documents at the bank’s branch for collection and not from the date of advance.
Advance against Export on Consignments Basis
Bank may choose to finance when the goods are exported on a consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports.
In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months.
Advance against Undrawn Balance
It is a very common practice in export to leave small part undrawn for payment after adjustment due to the difference in rates, weight, quality, etc. Banks do finance against the undrawn balance if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from the due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.
Advance against Claims of Duty Drawback
Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets.
In such a situation, banks grants advance to exporters at a lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank.
After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and the eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.