While details are still being finalised, the government is in talks with financial institutions and RBI to develop a scheme that will primarily offer collateral-free loans to exporters to cover costs associated with producing goods, based on their track record. “The idea is to expand export credit, develop new financing instruments and bring down interest rates for these exporters,” an official said, requesting anonymity.
High Interest Rates
Pre-packaging or packing loans are sanctioned for financing purchase of raw materials, labour, manufacturing and/or packing of goods prior to shipment.
Such a working capital guarantee product is crucial for MSME and ecommerce exporters as most of them are facing financial difficulties.
At present, only 15% of SMEs’ addressable credit needs are met by formal channels while 57% of the production in the country is done by such firms, as per the Federation of Indian Export Organisations (FIEO).Currently, most banks require collateral for lending to this segment, and the interest rates are on the higher side.“A draft report has been prepared, and discussions are on between the Department of Financial Services and the Department of Commerce to send the final structure to the RBI after taking inputs from other financial institutions,” said the official quoted above.
The move comes at a time when India’s goods exports rose a meagre 0.5% year on year in September after two months of contraction.
Ecommerce exporters are facing difficulties related to “trade finance procedural issues”, a second official said.
Under the existing framework, export credit is extended on orders placed. “Since orders are often placed on short notice and production usually occurs before the orders are received, most lenders are unwilling to extend full credit, and if they do, the interest rates are exorbitant,” the official said.
The proposed new provisions will resolve both these issues, he added.
Another official explained the rationale behind extending credit based on track record. Most banks give credit against orders but ecommerce orders are instant, which makes it difficult for them to do due diligence of the buyers. “So, the exporters’ previous order records can be checked,” the person said.
The collateral can be reduced because the insurance cover for banks has been raised up to 90% from 60% for the working capital loans and moderation in premium incidence for the MSME sector, the official added.
The government is also in discussions to firm up a more feasible working capital guarantee programme (WCGP) to bridge the large unmet need for working capital from formal sources by MSMEs.