Globalisation is gradually integrating countries from south to north pole, from east to west which has given desired momentum to global trade. As soon as an organization decides to give taste of its products to global customer, it has to chart out a clear strategic policy, adhering to firm level strategic direction, to deal with competition on quality, quantity, price, distribution and support service. Trade cycle in international market stretches from few days to number of years, depending upon the product. MSMEs, engaged in global business, will have to be competitive in terms of price as most of the products are now treated as commodities, except with process or new technological improvement. It is imperative for MSMEs to control finance and forex fluctuation cost from pre-shipment to post-shipment to final collection of the trade. Government supports exporters through export finance assistance in the form of foreign currency short term loan & interest rate subvention through banking channel and insurance of export earning through ECGC.
Exporter can avail pre-shipment credit in the form PCFC (packing credit in foreign currency) or EPC (export packing credit in INR). As the name suggests, this facility is given only to procure raw material, do processing & packaging till the final shipment happens. Exporter will present confirm order or contract to bank for availing PCFC/EPC. Bank has to ensure that credit is used only for export purpose and not diverted to other business activities. Once goods are boarded, pre-shipment credit has to be settled through post-shipment credit or through proceeds of earlier export.
PCFC are normally allotted as a sub limit to Fund Based limit and consideration is given to your past export performance. PCFC is quoted as LIBOR + spread. LIBOR can be 1,2,3,6 or 12 months depending upon your trade cycle. If an exporter has 2 months trade cycle, then there is no use of taking 3M LIBOR as interest rate will be high. Generally, 3M LIBOR varies from 0.5% in easy monetary condition to 3% in central bank tightening. Spread can vary from 100-250 basis point which is dependent upon credit rating and exporter’s servicing and uses of past pre-shipment finance facility. Exporter availing PCFC is naturally hedged as loans are in foreign currency which will be repaid by post-shipment finance mostly in foreign currency and post shipment financing facility will be knocked off by export earnings.
In case of EPC, exporter is prone to risk of forex fluctuations as credit is disbursed in INR. Exporter availing EPC needs to be cautious on two aspects, forward premium and interest rate subvention. At this moment, GOI gives 3% subvention to selected industries to promote export and employment opportunities. Forward premium is the interest rate differential between two countries risk free rate of interest i.e. yields on government bonds. Forward premium is now hovering around 4.3-4.4% annum. If an exporter is not passing forward premium benefit to importer then this income reduces interest cost burden.
Table mentioned below is a scenario analysis of PCFC Vs EPC
Hedge policy plays an important role in selecting from options available for pre-shipment and post shipment finance. Generally, banks do not pass on full premium as they charge some conversion margin from customer which they want to retain in any condition. In addition to this, they may trend up margin as exporter doesn’t have access to live interbank rate feed. Manager must have knowledge of forex hedging instruments available at his/her disposal to extract maximum premium and minimize risk. In nutshell, Finance/Treasury Manager must calculate benefits of drawing finance from either of the option by preparing a table.