One of the difficulties that exporters often encounter is a time lag between the time goods are delivered to the overseas market and the time the payment is received. During this period, the working capital may be stuck in export receivables. This gap could be addressed by post-shipment credit in foreign currency, which can facilitate export credit in a foreign currency for eligible Indian exporters.
Additionally, for companies with a foreign currency receivables position, borrowing in the same currency helps to coordinate financing with the expected foreign currency export proceeds. The pricing, currency exposure, market rates and transaction structure of the lender, however, will impact the actual advantage.
What Is Post-Shipment Credit in Foreign Currency?
Post-Shipment credit in foreign currency is export finance that is extended after goods are shipped or services are rendered, with the credit denominated in a foreign currency.
According to the export-credit framework of the RBI, post-shipment export credit is the financing that is extended from the date of shipment or service delivery till the export proceeds are realized. Foreign-currency post-shipment finance may also involve discounting or rediscounting foreign currency export bills eligible for financing.
The purpose of the facility is to cover the gap between the completion of an export transaction and the receipt of payment from the overseas buyer.
Read: Post Shipment Finance Meaning, Working, and Benefits
How Does PSCFC Work?
The basic foreign currency export finance cycle begins after an exporter ships goods or completes an eligible service.
- The exporter fulfills the export order.
- Export documents and bills are submitted through the designated bank.
- The bank assesses the transaction and applicable credit facility.
- Eligible export bills may be discounted or financed.
- The exporter receives funds according to the agreed arrangement.
- Export proceeds are used to settle the outstanding export credit.
RBI’s framework provides for foreign-currency export bills to be discounted or rediscounted, including through the Export Bills Rediscounting (EBR) mechanism.
Why Can Foreign-Currency Financing Reduce Borrowing Costs?
One potential advantage of PSCFC financing is access to foreign-currency funding rather than automatically borrowing in Indian rupees.
Foreign-currency export credit is priced using applicable market-based reference rates and the lender’s spread. Under the current RBI framework, banks can determine interest rates on export credit in foreign currency using widely accepted Alternative Reference Rates (ARRs) for the relevant currency, in accordance with their board-approved policies and applicable RBI directions.
This means exporters should not rely on older references to LIBOR when estimating current borrowing costs. LIBOR-based pricing in older RBI documents has been superseded by the current ARR framework.
When Does PSCFC Make Financial Sense?
Foreign currency export finance can be worth evaluating when an exporter has receivables denominated in the same currency as the proposed financing.
For instance, an Indian exporter receives a USD-valued export bill payable after 60 days. If the exporter receives eligible USD financing taking up that receivable, then the liability and the expected receivable are both in USD.
This can reduce the need to convert between currencies during the financing cycle. However, this does not eliminate every foreign-exchange risk. Any mismatch between the financing currency, invoice currency, and actual cash flows can create additional exposure.
Matching Financing With Export Receivables
Currency matching is an important consideration in export receivables financing.
Suppose an exporter expects to receive USD 200,000 from an overseas customer. If the financing is also denominated in USD, the expected dollar proceeds can potentially be used to settle the financing.
This differs from borrowing in rupees against a dollar receivable, where currency movements can affect the rupee value of the receivable and financing requirement.
RBI has specifically recognised that foreign-currency export credit can be provided under banks’ internal lending policies within the overall regulatory framework.
PSCFC vs Rupee Post-Shipment Credit
Exporters can compare PSCFC vs rupee export finance based on their currency exposure, pricing, and expected cash flows.
| Factor | PSCFC | Rupee Post-Shipment Credit |
| Currency | Foreign currency | INR |
| Typical basis | Export receivables | Export receivables |
| Interest pricing | Applicable foreign-currency ARR and bank spread | INR lending framework |
| Currency exposure | Depends on matching | Conversion exposure may arise |
| Suitable for | Exporters with relevant FCY cash flows | Exporters preferring INR financing |
Neither option is automatically cheaper. The exporter should compare the effective financing cost after considering interest, conversion costs, hedging, and other applicable charges.
How Exporters Can Control PSCFC Costs?
Reducing the headline interest rate is only one part of controlling export finance costs. Exporters should consider the following factors.
- Compare the Effective Financing Cost
Compare the applicable reference rate, bank spread, processing fees, documentation charges, and other financing costs.
However, a lower quoted interest rate may not necessarily result in a lower overall cost, with significant additional charges.
- Match the Financing Currency
If commercially viable, financing in the same currency as the export receivable can reduce currency mismatch.
However, exporters should assess the exposure carefully before choosing the currency.
- Monitor the Financing Period
Interest costs increase as the financing remains outstanding. Exporters should track expected customer payment dates and avoid unnecessarily extending the financing period.
- Improve Receivables Management
Faster invoice processing, accurate export documentation, and timely follow-up with overseas customers can help reduce collection delays.
Shorter financing periods can directly reduce the total interest burden.
What Happens When Export Proceeds Are Received?
Post-shipment export credit is generally linked to the realisation of export proceeds. RBI’s framework provides that post-shipment credit is liquidated through proceeds received from abroad for the exported goods or services. Subject to the banker’s agreement, certain other permitted sources can also be used for repayment or prepayment.
The exact settlement process depends on the financing arrangement and the bank’s procedures.
Key Risks Exporters Should Consider
Although foreign currency post-shipment finance can provide cost and cash-flow advantages, it is not risk-free.
The key considerations include:
- Foreign-exchange movements
- Interest-rate changes
- Customer payment delays
- Financing charges
- Currency mismatch
- Export documentation issues
- Overdue export bills
An exporter should not choose foreign-currency financing solely because the quoted interest rate appears lower.
Making Export Financing More Cost-Efficient With Credlix
Efficient export financing requires businesses to look beyond the interest rate. The financing currency, receivable cycle, customer payment terms, and overall transaction cost all influence the economics of borrowing.
Credlix provides digital trade finance solutions designed to help eligible businesses manage working capital and trade-related liquidity requirements. For exporters evaluating foreign currency financing, understanding the underlying cash-flow cycle can help determine whether a particular financing structure is commercially appropriate.
The availability, pricing, currency, documentation, and terms of any financing facility depend on the business profile, transaction structure, lender assessment, and applicable regulatory conditions.
FAQs
What is Post-Shipment Credit in Foreign Currency?
Post-Shipment Credit in Foreign Currency is export finance provided after goods are shipped or services are rendered, with the credit denominated in a foreign currency. It can help eligible exporters access liquidity before overseas customers make payment. The facility may involve financing, discounting, or rediscounting eligible export bills, subject to applicable requirements.
Can PSCFC reduce borrowing costs for exporters?
PSCFC financing can potentially reduce borrowing costs when foreign-currency funding is competitively priced and appropriately matched with export receivables. However, the actual cost depends on the applicable reference rate, lender spread, fees, financing period, currency movements, and hedging requirements. Exporters should compare the complete cost rather than relying only on the interest rate.
Is PSCFC suitable for every Indian exporter?
No. Foreign currency export finance is not automatically suitable for every exporter. Businesses should consider their export currency, expected receivables, financing requirement, currency exposure, credit profile, and lender requirements. The facility is subject to applicable RBI regulations, bank policies, documentation, and assessment of the underlying export transaction.
