India's $2 lakh crore export ambition wants top boss to rescue it from bank credit crunch

India’s exporters are grappling with a significant credit crunch despite a surge in overall lending across the economy. Over the past two years, credit available to exporters has dropped by 5%, a troubling trend that contrasts sharply with the growth seen in other sectors. This decline is particularly evident in priority sector lending for exports, which has plummeted by 41%, from Rs 19,861 crore to Rs 11,721 crore.

As India targets $2 lakh crore worth of goods and services exports by 2030, addressing the credit crunch is crucial.

The reduction in credit has prompted the commerce department to raise concerns with the Reserve Bank of India (RBI) and the finance ministry. The Federation of Indian Export Organisation (FIEO) has highlighted this issue as a major obstacle for exporters, who face mounting pressures due to rising commodity prices, increased freight rates, and geopolitical tensions from West Asia to Red Sea impacting shipping routes.

Export Credit Faces Severe Decline

The situation has become increasingly dire. FIEO Director General Ajay Sahai told PTI, "We have seen a decline in export credit between March 2022 and March 2024 despite the need for more credit for longer duration due to hike in prices of commodities, sharp spurt in freight (both sea and air) and the Red Sea crisis, leading to longer voyage time and delayed payment."

Despite frequent warnings from exporters and the growing urgency of the situation, the government and the RBI have yet to implement effective measures. The issue is expected to be revisited during an upcoming meeting of the Board of Trade, led by Commerce and Industry Minister Piyush Goyal later this week.

Challenges Highlighted by Industry Experts

An industry expert pointed out that while post-Covid guarantee-based loans initially helped industries secure credit, the landscape has shifted drastically. "The lack of collateral-free and non-recourse finance is a big challenge," the source told ToI. Many banks have set their own stringent policies, making it difficult for exporters to access the necessary funds.

To address these challenges, FIEO has proposed additional support from the Export Credit Guarantee Corporation (ECGC) and an increase in interest subsidies. According to Sahai, FIEO has suggested that the RBI consider prescribing a sub-target for export credit within the existing 40% target for priority sector lending. This move could help alleviate some of the credit flow issues that exporters are facing.

Comparing India’s Export Financing to Global Standards

Indian exporters face high logistics costs and elevated credit costs, putting them at a disadvantage compared to their counterparts in countries like Canada, Italy, the UK, and China. Despite opportunities presented by the "China Plus One" strategy, which encourages businesses to diversify their supply chains, additional funding is essential for Indian exporters to capitalise on these prospects.

The declining credit is poised to impact the sector negatively. According to FIEO, the value of outstanding export credit decreased from Rs 2,27,452 crore in March 2023 to Rs 2,17,406 crore in March 2024. The consistent decline in credit to exporters during recent times requires urgent attention, Sahai told PTI.

Proposed Solutions and Government Response

FIEO has recommended several measures to improve the situation. They suggest enhancing the availability of pre- and post-shipment credit in foreign currencies through International Financial Services Centre (IFSC) Banking Units (IBUs). This move could help Indian exporters compete more effectively on a global scale by reducing the financing cost gap between Indian and international competitors.

Additionally, FIEO has advocated for an increase in the insurance coverage provided by ECGC, which could act as a substitute for collateral and reduce credit risk assessments. Sahai also proposed that the government popularize the Gold Card scheme for exporters, which offers easier access to credit for those with a proven track record. Banks may be asked to automatically issue gold cards to all eligible customers to extend the benefits, Sahai suggested.

Interest Subvention and Export Growth Concerns

FIEO President Ashwani Kumar emphasised the need for better interest equalisation policies. Each bank has framed its own rule and applies its own logic, which is detrimental to export promotion, Kumar said. He recommended increasing the interest subvention rate to 4-5% to counteract the rising costs.

The current cap on annual net subvention at Rs 10 crore per Importer-Exporter Code (IEC) has also been problematic for some exporters. The denial of interest subvention beyond Rs 10 crore makes exports uncompetitive for some SMEs, Kumar explained.

FIEO also highlighted that the Interest Equalisation Scheme (IES) excludes exporters who benefit from production-linked incentive (PLI) schemes, affecting their competitiveness. Sahai called for improvements in the Export Data Processing and Monitoring System (EDPMS) to streamline the settlement of outstanding entries.

Mumbai-based exporter Sharad Kumar Saraf voiced concerns about the uncertain global situation and its potential impact on export growth.

With exports rising 4.15% to USD 144.12 billion during April-July of the current fiscal year, and imports growing 7.57% to USD 229.7 billion, the need for effective solutions to the credit crisis is more pressing than ever. The upcoming discussions with Commerce and Industry Minister Piyush Goyal will be pivotal in shaping the future of India’s export sector.