If policymakers really want to strengthen and stimulate India’s export sector, all they need to do is further ease the supply of credit to exporters and make financing option more viable. Is that asking too much?

The Dollar Business Bureau | @TheDollarBiz  

Let’s suppose you are a manufacturer of glass bottles and have been running a successful business for the past several years. But what you have been doing all these years is producing high-quality product for supplying across just the domestic market…and of course, waiting patiently for that one high-volume, high-value overseas order that could catapult your business to the next level. Suddenly you get one, and it’s a big one. It’s your chance, but in order to honour it, you would need to make large investments in terms of raw materials, logistics, man-power, machinery, etc. Unfortunately, you don’t have the capital to make this investment. So, what do you do? That’s where the RBI’s ‘Export Credit’ Scheme comes to your rescue. All you need to do is to walk into a bank and avail credit, just on the basis of the export order you have received.

So, what it this scheme and how can it help you? Export Credit can be broadly divided into two subcategories – Pre-shipment Export Credit and Post-shipment Export Credit (both in foreign currency and INR). Pre-shipment Credit also known as ‘Packing Credit’ is a loan granted to an exporter for financing his/her working capital requirements prior to the shipment of goods and is sanctioned against a letter of credit or a confirmed and irrevocable order for the export of goods or services from India. On the other hand, Post-shipment Credit, as defined by RBI, means “any loan or advance granted or any other credit provided by a bank to an exporter of goods or services from India from the date of extending credit after shipment of goods or rendering of services to the date of realisation of export proceeds as per the period of realisation prescribed by Reserve Bank of India and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time.” As per the current Reserve Bank of India guidelines, the period prescribed for realisation of export proceeds is 1 year from the date of shipment. The story so far

RBI first introduced the scheme in 1967. Under the initial scheme, which was in force up to June 30, 2010, RBI fixed only the ceiling rate of interest for export credit. Banks had the final authority to decide the rates of interest as far as they were within the ceiling rates and respected the Benchmark Prime Lending Rate (BPLR) and spread guidelines apart from taking into account track record of the borrowers and the risk perception. Further, to enhance transparency in pricing of loan products, the banks were advised to fix BPLR after taking into account the actual cost of funds, operating expenses, and a minimum margin to cover regulatory requirement of provisioning of capital charge and profit margin. However, the BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system banks could lend below BPLR and as such it was difficult to assess the transmission of policy rates of RBI to lending rates of banks.

Hence, based on the recommendations of the Working Group on Benchmark Prime Lending Rate, banks were advised to switch over to the system of Base Rate. Under the new system, applicable with effect from July 1, 2010, interest rates applicable for all tenors of rupee export credit advances are at or above Base Rate. To further boost exports from India, the government, in 2007, also announced a package of measures to provide interest rate subvention of 2 percentage points per annum on rupee export credit availed by exporters across nine categories of exports, viz., textiles (including handlooms), readymade garments, leather products, handicrafts, engineering products, processed agricultural products, marine products, sports goods and toys and to all exporters from the SME sector defined as micro enterprises, small enterprises and medium enterprises for a period from April 1, 2007 to September 30, 2008. The coverage has only been extended since then to other sectors and industries as well.  

All is not hunky-dory

Over the last 10 years India has managed to achieve an average annual export growth of about 22%. Excluding a slump starting FY2009, total exports increased steadily. In fact, export growth slowed only to rebound in FY2012 due to various measures introduced by the government such as the Gold Card Scheme, enhancement of the rupee export credit refinancing limit, and deregulation of interest rates on export credit in foreign currency. However, exports began to fall again in FY2013 because of the continued decline in global demand. Another factor, apart for the global slowdown, that perhaps has had, and might continue to have, a dampening effect on the growth of India’s exports is the 2012 revision in RBI guidelines for priority sector lending (PSL). As per the new guidelines, foreign banks with more than 20 branches are not required to lend to the export sector. Prior to these revised guidelines, RBI mandated all foreign banks, to lend a fixed portion of their portfolios as export credit under PSL.

For domestic banks, export was not a separate category in PSL. However, with the revision in PSL norms, this mandate now applies only to foreign banks with less than 20 branches. This has further squeezed the liquidity in the exports sector. According to RBI data, export credit by banks as percentage of net bank credit fell to 3.7% in FY2013 from 9.8% in FY2000. The June 2014 cut in export credit refinance (ECR) too has increased credit woes for exporters, particularly for small and medium enterprises. For the uninitiated, to encourage Export Credit, RBI too provides export credit refinance (ECR) facility to banks. This facility is given on the basis of banks’ eligible outstanding rupee export credit, both at the pre-shipment and post-shipment stages. The quantum of refinance is fixed from time to time based on the stance of monetary policy of the RBI. At present, the scheduled banks are provided ECR to the extent of 32% (the limit was reduced from 50% to 32% on June 3, 2014) of the outstanding export credit eligible for refinance as at the end of the second preceding fortnight.

Export credit by banks as percentage of net bank credit fell to 3.7% in FY2013 from 9.8% in FY2000

  Answer lies within

This is certainly a major concern for a country like India that perennially runs a merchandise trade deficit – over $100 billion for each of the last five years - and in turn necessitates increasing credit supply to exporters. But the question is how? If India really wants to strengthen and stimulate its export sector, it certainly needs to bring exports credit under PSL. A recent study titled “Re-prioritising priority sector lending in India” by US-based Nathan Associates Inc. and supported by UK government states that “Export credit must be revitalised as a priority sector and promoted to stimulate economic growth.” The study estimates that a 1% fall in priority sector lending to the export sector will result in a 0.76% loss to GDP. “India is facing a rising current account deficit and an export-led growth strategy could help it reverse the trend; reducing credit available to the export sector will only thwart the solution,” states the study.  

Project Exports is another area that has great potential to earn foreign exchange for the country. Although export credit agencies like Project Exports Promotion Council of India (PEPC) and EXIM Bank have been impressively handling it for the exchequer, they certainly need more support from the government in order to finance emerging enterprises and sectors. “We have realised that current norms restrict Exim Bank’s funding to a single project to up to Rs.1,200 crore because of which it cannot lend to large-value projects, especially those related to railways, roads and power sectors. Such Indian projects are in demand in many neighbouring countries as well as some developing countries in Africa.

Exim Bank therefore has asked the government for a 50% increase in the borrowing limit to 15 times of its net owned fund. Besides this, we have also asked for a $10-billion line of credit from forex reserves to support high value project exports from India. We hope that with these changes we will be able to better our mandate,” Yaduvendra Mathur, Chairman & Managing Director, EXIM Bank told The Dollar Business in an exclusive interaction a couple of months back. Although export promotion has been at the top of every policymaker’s mind - numerous incentives and schemes have been floated to boost our exports in the past decade - a lot still needs to be done when it comes to extending advisory and support services to exporters, particularly export financing. If policymakers really want to boost exports, and in turn bridge the widening deficit, they will have to ensure a greater flow of credit to exporters. Else, it will always and forever remain the same old struggle.