Packing Credit

Packing credit is a short-term loan that a bank grants to an exporter before shipment, against a confirmed export order or an export letter of credit, so the exporter can buy raw materials, manufacture, process and pack the goods. It is repaid, or "liquidated", from the proceeds of the export, usually by converting it into post-shipment finance when the shipping documents are handed to the bank.

Packing credit is the best-known form of pre-shipment finance and is mainly a South Asian product, used in India, Pakistan, Bangladesh and Sri Lanka, where central banks have long regulated and often subsidised it. Elsewhere, similar needs are met by export working capital loans or purchase order financing. The name comes from the final stage it pays for: packing the goods ready for shipment.

A textile mill in Karachi or Tiruppur receives an order from a European retailer for 50,000 shirts, to be paid when they are shipped. The mill must buy cotton, pay workers and buy cartons weeks before that. Its bank looks at the order, agrees it is genuine, and lends most of the money needed to make the shirts.

The deal is simple: when the shirts are shipped, the mill brings the shipping papers to the same bank, and the money from the buyer, or a new loan against those papers, pays off the packing credit. The bank is lending against a promise of export, so it keeps an eye on whether the shirts are actually being made and shipped on time.

1. The exporter applies with a firm order or an export letter of credit, and the bank sanctions a limit based on the order value, the exporter's track record and its working capital cycle.
2. The bank keeps a margin, lending a percentage of the order value, and may take a charge over the raw materials and goods in process as collateral.
3. Funds are released in stages as needed, often paid directly to suppliers, and the bank checks stock and progress.
4. After shipment, the exporter submits the export documents to the bank, which negotiates, purchases or discounts them, or sends them on collection.
5. The resulting proceeds, or the new post-shipment advance, repay the packing credit.

Many exporters with steady business use a running account facility, in which packing credit is drawn before specific orders are matched, provided they are matched later. Banks also allow liquidation with documents from a different order, as long as the export takes place.

In India, packing credit is part of the Reserve Bank of India's export credit framework. Under its master circular on rupee and foreign currency export credit, if a pre-shipment advance is not adjusted by export documents within 360 days of the advance, it loses the concessional export credit treatment from the start. Exporters can borrow in rupees or through pre-shipment credit in foreign currency (PCFC), which is priced off foreign currency rates and repaid from foreign currency export proceeds, giving a natural hedge against foreign exchange risk. Export credit counts towards banks' priority sector targets in some categories, and the interest equalisation scheme, which ran from 1 April 2015 to 31 December 2024, lowered the cost of rupee packing credit for eligible exporters, especially MSMEs.

In Pakistan, the main packing credit channel is the State Bank of Pakistan's Export Finance Scheme (EFS), in operation since 1973, under which commercial banks lend to exporters at a concessional rate and are refinanced by the central bank. Part I of the scheme is transaction-based, tied to a specific order or letter of credit, while Part II gives a revolving limit linked to the exporter's export performance in the previous year. Exporters must show shipments that match the finance, or pay a penalty. The State Bank also runs longer-term schemes for machinery, which sit outside packing credit.

In Bangladesh, garment exporters combine packing credit with back-to-back letters of credit, in which the bank opens an import credit for fabric and trims backed by the exporter's master export credit, so that the exporter needs little cash of its own.

Packing credit is a performance loan: the bank is exposed if the exporter fails to ship, ships late, or ships goods the buyer rejects. Common problems include:

• Diversion of funds. Cheap export credit used for domestic business, property or other borrowing.
• Fictitious or inflated orders. Orders created to obtain finance, sometimes with related-party buyers, a known trade-based money laundering pattern.
• Overdue liquidation. Advances that are never matched by shipments and end up as a non-performing loan.

Banks respond with end-use checks, stock inspections, verification of buyers and letters of credit, insistence that export documents and proceeds flow through the lending bank, and monitoring under export proceeds repatriation rules. Where the export is backed by an export letter of credit, the bank also checks whether it is a red clause letter of credit, under which the advance may already be covered by the importer's bank.

• Reserve Bank of India
• State Bank of Pakistan