• Trade Advice
    Packing Credit in Exports

    Packing Credit in Exports | Meaning & The Complete Guide

    In international trade, importers are often cautious about making advance payments to their exporter for several reasons. This, however, may lead to a shortage of funds for the exporter to procure the raw materials or pay the labor cost of manufacturing. Lack of working capital may lead to the deal not getting sealed. To avoid such a scenario, exporters can avail of a type of loan called Packing Credit.

    What is Packing Credit in export?

    Packing credit or Pre-Shipment Credit is a type of finance provided by financial institutions to exporters to make the necessary arrangements for manufacturing the goods for their export orders. They can borrow the amount, meet their capital needs and return it with interest once the buyer makes the full payment, which would take around 150-180 days.

    Obtaining a packing credit means that all the costs related to manufacturing like working capital, raw materials, labor and machinery costs, transportation, etc. are taken care of.

    Why is Packing Credit important?

    A country’s economy grows with its exports, it’s only natural that governments around the world do all within their powers to support, encourage and empower their exporters. The Reserve Bank of India (RBI) is also of the opinion that no international trade deal should ever have to fall through due to lack of funds on either side.

    By availing of Packing Credit, exporters can fulfill their working capital requirements. This equips them to handle the biggest of export orders.

    Eligibility Criteria for Export Packing Credit

    An exporter who has received a confirmed export order from a buyer or an irrevocable Letter of Credit (LC) can apply for a packing credit loan from any registered bank in the country. If the exporter does not have a receipt of the order, the bank may provide Packing Credit based on the communication one might have had with the buyer. However, it must reflect important information like description of goods, product quantity, name and other details of the buyer, etc. Also, the exporter must submit the LC or the export order to the bank once he receives it on a future date.

    Features of Packing Credit


    Self-liquidating loans refer to a type of credit wherein funds are used to procure or produce goods and then, it is sold to repay the loan. Such loans are reliable in nature. Packing credit enjoys the self-liquidating feature since the repayment is guaranteed based on a confirmed export order.

    Lower Rate of Interest

    Banks charge a lower rate of interest on Packing Credit loans as against other types of credit such as Overdraft. This helps an exporter carry out the trade without worrying about exorbitant interest rates and keeps them from falling into the jaws of the loan sharks.

    Exporter-Friendly Terms of Credit

    The terms for Packing credit loans are flexible, with banks asking for repayment once the buyer makes the final payment to the supplier. This is due to its self-liquidating feature. which makes it risk-free.

    Great Way to Finance the Working Capital Requirements

    Packing credit covers the manufacturing-related expenses like wages, cost of raw materials, transportation and machinery. If the exporter has outsourced all or a part of the goods that are to be shipped, packing credit is quite convenient. It is a great way to meet the working cost even if it balloons out of the budget slightly.

    Types of Packing Credit (Pre-shipment Credit)

    1. Extended Packing Credit Loan

    Banks offer Extended Packing Credit loans to clients who have a good credit history. The term of repayment goes beyond the regular 180-day period.

    2. Secured Shipping Loans

    Exporters can avail of this loan when the finished product is manufactured and ready to be shipped.

    3. Advances against Back-to-Back Letter of Credit

    Banks provide this type of Packing Credit to an exporter against a back-to-back LC.

    4. Red or Green Clause Letter of Credit

    Red Clause LC is a type of packing credit provided by the banks when a supplier fails to allocate enough funds for manufacturing the goods for the export order. The supplier opens a Red Clause LC, which has a clause typed in red that authorizes the bank to make the necessary payment to the supplier to meet his working capital demand.

    A Green Clause LC works in the same way, however, it only covers the storage costs of goods at the port. In India, it’s necessary to take the government’s permission to open both these LCs.

    5. Advances against Export Incentives

    Export Incentives is provided both at a post-shipment or a pre-shipment stage. It’s a credit given by the bank to an exporter against the incentives that he/she would be eligible to receive at a later stage. Once the exporter receives the incentives, he/she makes the repayment to the lending bank.

    6. Advances Against Duty Drawback

    The government incentivizes exports by providing duty drawbacks on the raw materials used to manufacture the end product for exports. Banks provide packing credit for a period of 90 days against such refunds.

    Pre-shipment Credit in Foreign Currency (PCFC)

    PCFC is a type of Packing Credit wherein the bank lends in foreign currency. The exporter is liable to pay back the loan in the same foreign currency to the bank. Such a facility helps the exporter community by making the credit available at internationally competitive rates. If the PCFC loan isn’t cleared within 360 days, it is then treated as a Rupee credit and the applicant is charged an exorbitant rate of interest until he/she makes the full payment in INR.

    Apply for Invoice factoring with drip capital

    How do you get Packing Credit?

    Here is a stepwise process to apply for a Packing Credit:

    Step 1

    Once you’ve received a confirmed export order from your buyer, contact your bank and make a formal application for a Packing Credit. The bank will ask for documents related to your company as well as the export order.

    Step 2

    Upon submission of the documents and establishing their credibility, the bank takes a call on the amount of credit they will provide you. Generally, banks have a Packing Credit Limit of up to 20 to 25% of your total annual sales on your balance sheet.

    Step 3

    If you have multiple export orders, the bank opens different loan accounts for every order. Once the funds have been sanctioned, the bank starts charging the interest until the repayment is done for the full amount.

    Step 4

    Banks ask for phase-wise information about your expenditure and disburse the amount accordingly in parts.

    Packing Credit for Deemed Exports

    Packing Credit loans are also extended to projects that are funded by bilateral or multilateral agencies like the World Bank, International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), etc. Any materials produced for these projects are known as deemed exports.

    In the case of PCFC, the term of repayment for the deemed exports is a maximum period of 30 days or up to the date of payment by the funding authorities, whichever is earlier of the two.

    Also Read: Deemed Exports under GST | Procedure for Refund

    Packing Credit - With Example

    Suppose you’re an apparel manufacturer in India and receive an order for exporting 25 thousand pairs of socks to a company in Germany. Now you need around Rs 50 lakhs to manufacture the entire order but lack the funds to do so. So instead of opting for any other type of loan, you apply for a Packing Credit facility with a bank.

    Once you’ve managed the funds, you initiate the production of socks as per the order and ship it to your buyer back in Germany. The buyer receives the order and makes the full payment in Euro. Once you receive the payment, you convert it into INR and pay back the amount to the bank along with interest. This is known as an Export Packing Credit (EPC). In EPC, the bank lends the exporter in the form of the local currency.

    However, if an exporter applies for a PCFC, the bank lends him/her the amount in the form of a foreign currency (one that the buyer is likely to pay in), and the repayment to the bank is also done in the same foreign currency. So instead of lending you Rs 50 lakhs, the bank would lend you the Euros of the same value, applying the current conversion rates. For all purposes, you will still be credited INR in your bank account. However, when the buyer makes the payment in Euro, you are required to pay the bank back in Euros. By doing this, the government ensures that the forex reserve of the country remains unaffected and that whatever forex leaves the country, comes back promptly.

    Packing credit vs Working Capital vs Letter of Credit vs Cash credit

    A Packing Credit loan is a type of loan provided by banks to exporters who have secured a confirmed export deal and need funds to manufacture the products for that particular deal.

    A working capital loan is a type of loan provided by banks to businesses and entrepreneurs who run short of cash to manage their day-to-day activities. These are generally short-term loans.

    A letter of credit is a type of financial instrument provided by banks that acts as a guarantee of payment between the buyer and the seller.

    Cash credit loans are loans provided by banks to companies and individuals when they run out of bank balance in their account and need money on an urgent basis. You can only borrow up to a limit decided by the bank.

    Also Read: Types of Letter of Credit

    FAQs on Packing Credit

    1. Who can for avail packing credit?

    Any Export House, Trading House, Star Trading House, Super Star Trading House or an Exporter who has received the letter of credit or confirmed export order from the overseas buyer directly can avail packing credit.

    2. Who can provide packing credit to exporters?

    All the registered banks provide packing credit facilities to exporters based on the necessary documents furnished by the exporters like a confirmed export order or an Irrevocable Letter of Credit.

    3. How to calculate packing credit limit?

    Banks generally put a cap of 20 to 25% of the total annual sales of a company while providing packing credit loans.

    4. Can packing credit be liquidated?

    Yes. Packing credit is a self-liquidating credit and hence is a very reliable type of financial instrument.

    5. What is the packing credit interest rate?

    The interest rates for packing credit differ from bank to bank but they’re generally between 4-5% which is much lower than the rates for most other loans.

    6. How packing credit is different from post-shipment credit?

    Packing credit is a type of pre-shipment finance where the exporter is given a loan against an export order before it has been shipped, while post-shipment credit is a type of loan given to an exporter against an export order that has already been shipped.

    Also Read:

    Apply for working capital loan for exporters

    Avani Ghangurde
    Avani Ghangurde
    Manages the PR and Communications at Drip Capital.
    10 min read