Scheme's intention stymied on ground

In 2015, the central government renamed the earlier interest subvention scheme an interest equalisation scheme. And, decided to give a rebate of three per cent on the interest rates for pre-shipment and post-shipment credit.

The scheme covered all export of micro, small and medium enterprises (MSMEs) and by all manufacturers of items covered under 416 tariff lines (mostly labour-intensive and job-generating sectors). However, the scheme was not available to merchant exporters.

Last November, it raised the interest equalisation to five per cent of all MSMEs’ export. Last month, merchant exporters were also extended the three per cent interest equalisation. The Reserve Bank of India (RBI) issued the needed instructions to banks from time to time. The idea behind the scheme is to help MSME exporters and those of the specified items to get credit at lower rates, for competing better with entities across the world which get credit at very low interest.

Recently, some concerns have surfaced regarding effective administration of the scheme. Ravi Sehgal, chairman of the Engineering Export Promotion Council, says: “A look at the latest RBI data up to end-October 2018 conveys the issues being faced when it comes to credit. Against gross credit deployment of Rs 434 billion till end-October 2017, the figures dropped (a year after) by 54.6 per cent to Rs 197 bn. While there might be several global factors such as a trade war between the United States and China or uncertainties over Brexit (the United Kingdom’s exit from the European Union) hitting export demand, the cost of credit remains a big concern for us.”

He said the subdued flow of credit was seen in the engineering segment as well. Year-on-year growth of bank credit to the engineering sector grew by only 4.6 per cent as on end-October. Credit is the lifeline of the industry and exporters and the situation needs to be addressed, says Sehgal.

  

RBI has asked banks to grant export packing credit to manufacturer-suppliers without export orders or letters of credit in their own name and where goods are exported through State Trading Corporation, MMTC or other export houses or agencies. The instruction recognises that in most cases, the merchants holding export orders deploy their funds only after the manufacturer has despatched the goods or after the latter are shipped and documents negotiated. Till then, the manufacturer has to deploy own funds to procure raw materials and meet the processing costs and overheads.  If unable to get funds at lower interest rates, his competitiveness gets eroded. Even so, some bankers are denying the benefit of interest equalisation to manufacturers who export their goods through merchant exporters. Their reasoning is that these sales to merchant exporters are domestic sales, not export that bring in foreign exchange. 

Thus, well-intended schemes are not being fully implemented in letter and spirit at operating levels. It is for the government and RBI to ensure enough credit to exporters and transmission of interest equalisation benefits as intended.

E-mail:tncrajagopalan@gmail.com