Reality test needed for RBI credit rules

The Reserve Bank of India (RBI) gives exporters nine months from the date of export for realisation of the proceeds. The exception is 15 months for goods exported to a warehouse outside India.

The RBI needs to understand better the implications of these stipulations. Export proceeds of most shipments made without buyers being extended any credit come after about a month. For, it takes time for collection bills to reach the foreign buyer through banks and for payments to get routed through the proper channels. Quite often, foreign buyers wait for the shipments to arrive before retiring the bills.

Many exporters also extend credit to the buyers — three or six months or even more. In many cases, goods are consigned directly to the buyer on open credit terms, allowing him to pay within a reasonable time. So, on average, the dues owed to an exporter at any point of time will be more than 10 per cent of the total, even where all his bills are paid within the nine months limit allowed by RBI.

This simple point, it appears, has not been understood well. The RBI says banks may consider the applications from exporters and grant permission for opening or  hiring of warehouses abroad. 

This is if the applicant’s export dues do not exceed five per cent of the shipments made during the previous financial year.

In another context, the RBI says, for those in the export business for more than three years, a reduction in invoice value may be allowed, without any percentage ceiling. Provided, though, that the dues do not exceed five per cent of the average annual export realisation during the preceding three financial years. In yet another context, RBI says, while considering an extension beyond one year from the date of export, the total export dues should not exceed $1 million or 10 per cent of the average export realisation during the preceding three financial years, whichever is higher.

For any exporter, the chance of meeting the conditions — dues not exceeding five per cent of the previous year’s export or 10 per cent of the annual average export realisation of the previous three years — are very low. Where export is  increasing, these conditions are even more difficult to meet — the previous year’s export or annual average realisation of the previous three years are bound to be lower than the current year’s shipments.

Many bankers take a practical view. They check if the amount outstanding beyond the period allowed by RBI for realisation of export proceeds is within the 5-10 per cent limit. However, there is also no dearth of bankers who read the RBI instructions strictly. And, deny the facility, taking into account the total of export dues even within the period allowed by RBI at the time an application is made.

Obviously, RBI needs to review its instructions and stipulate that the dues outstanding beyond the period allowed by it alone should be within the limit of 5-10 per cent of the previous year’s export or the annual average export realisation of the previous three years. 

It should also review whether the nine months limit for realisation of export proceeds is realistic when the global economy is slowing and buyers demand more time to pay their bills. 

Email: tncrajagopalan@gmail.com