FIEO favours separate lending target
for small exporters
The External Members of a RBI Working Group, constituted in Aril 2005 to review export credit, held a meeting on 8th January at Mumbai under the Chairmanship of Mr. N Shankar, Executive Director, Exim Bank to assess the flow of credit to SME exporters.
Addressing the meeting, FIEO President Mr. Ganesh Kumar Gupta strongly recommended fixing a separate export credit target for SME sector saying the sector contributes about 20% to our GDP and employs more than 40% of our total workforce. At this juncture when rising rupee is choking the very existence of SME exporters, he said, there is an urgent need to fix a separate lending target for them.
Meanwhile, Mr. Gupta expressed displeasure with the dwindling share of export credit in the total lending by the banks. He said: "As per RBI data in March 2000, the share of export credit in the total bank credit was 9.8%, which declined to 5.6% in December 2006, notwithstanding RBI guidelines of earmarking 12% of the total credit to export sector."
In view of subventions of export credit provided twice by the RBI last year, said FIEO President, exporters should be offered deferred terms of credit. He said: "The credit period for pre-shipment is 180 days (270 days for carpet sector) and 90 days for post-shipment. It is suggested that since for repatriation of export proceeds, 360 days have been granted to status holders, the period for providing credit (pre and post shipment) should be contiguous with the same." He further said that subvention benefits should be extended to sectors like gems & jewellery, plantation crops such as tea & coffee and other labour intensive sectors.
Referring to Cost of credit, Mr. Gupta said earlier it was 7.75% for Gold Card Scheme and 8% for normal exports but now a minimum cap of 7% has been imposed providing a reduction of 0.75 to 1% and thus the cost of credit continues to be higher than what prevails in competing countries.
On service charges levied by banks, FIEO Chief said, besides interest rate, banks charge high transaction cost for negotiation and handling of bills which is nearly quarter per cent of the bill amount. This charge should be limited to flat Rs.100 to Rs.200 per transaction. Over and above, banks charge high profit margin for conversion from foreign currency to Indian Rupees which is around 6 to 7 paisa per dollar over Inter-Bank Rate. This should be reduced to not more than half a paisa per dollar, he added. FIEO Chief further pointed out that the above costs are over and above the actual cost of credit which is 7-8% even after subventions which in any case is much higher than the international average of 5 to 6%.
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A Working Group was constituted by the RBI in Aril 2005 to review export credit under the Chairmanship of Chief General Manager Mr. Anand Sinha with other members representing RBI’s Monetary Policy Department, State Bank of India, Canara Bank, FIEO and some export promotion organizations. The terms of reference of the Group were:
After the two meetings held on 19th and 25th April, a Report was submitted by the Working Group in May 2005. |
On insistence of Collaterals by banks, FIEO President said banks obtain high percentage of collateral securities by way of equitable mortgages on properties and/or cash deposits. Sometimes it ranges even more than 50% of the fund based limits sanction. Besides personal guarantee of directors as well as relatives are asked for. Banks should sanction the limits only against personal guarantee of the directors and should not insist on other collaterals in case of export finance, he added.
Referring to a circular issued by the Chennai office of Indian Overseas Bank, FIEO President said some banks have issued guidelines to their branches stating that "all Post-Shipment advances not against Letter of Credit including advances against collection bills should be covered under ECGC’s WTPSG." He said the premium should be remitted by the branch as per the guidelines and the premium should be borne by the Bank. He elaborated that with the appreciating rupee there is a need to reduce costs incurred in the production of the end product for export saying that the payment of premium by the export sector adds to the transaction costs and the cost of credit. He requested that RBI should issue necessary directives to the banks in this regard.
About reducing export documentation, FIEO President said although Rupee is convertible on the current account, exporters are asked to submit documents at every transaction. He said export turnovers of about Rs. 25 to 30 crore are spread over roughly 400 invoices and asking for copy of invoice and Form A1/A2 for each transaction was thrusting excessive paperwork on the exporters. He further said there are occasions when advance payments are clubbed with payment for material already imported, but banks refuse to allow such partial payments.
Given the exigencies of business, said Mr. Gupta, it is imperative that banks take a liberal view and accept inward and outward payment from Status Holders/EOUs/Registered Exporters with general undertaking that such money is legitimate part of business and that the Exporters/Status Holders are responsible for any excess or short payments and they should be permitted to make part payments. "This is sine qua non for deregulated business environment and will make us more competitive," he added.
Speaking further, FIEO President called for doing away with prior RBI permission in case of advance payment for capacity booking of exports and also suggested removing one year cap. At present permission is required from RBI for accepting advance towards capacity booking for exports which takes a substantial amount of time. The manufacturing capacities of the concerned exporter are booked in advance by subsidiaries based abroad. Advance payments against export orders are permitted and the goods are to be shipped within one year. The cap of one year causes inconvenience to the exporter.
He further said the manufacturer exporters having proven track record should be permitted to accept advance against capacity booking for exports with obligation to export the goods within the specified terms of contract without any cap from RBI.
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Status Holders may apply for VKGUY benefits DGFT, vide its Public Notice No.93 (RE-2007)/2004-09 dated 26th December, 2007 has announced that All Status Holders of Agri Products may apply for grant of Duty Credit scrip for agricultural exports made during 2007-08 to RA , CLA, New Delhi in ‘ANF for Para 3.8.6’ alongwith documents prescribed therein. Applicants may file one application before the last date prescribed for each half-year period (Apr-Sep/Oct-Mar). Applications for exports during Apr-Sept 2007 shall be filed from 15.1.2008 till 15.2.2008, and for exports during Oct-Mar 2008; applications shall be filed from 1.5.2008 till 31.5.2008. Applications received after the last date shall be summarily rejected, as Para 9.2 and Para 9.3 shall not be applicable. Date of exports shall be determined in terms of Para 9.12. Application fee shall be the same as it is for VKGUY benefits under Para 3.8.2. |
With respect to third country exports, FIEO Chief said the authority for raising purchase orders and other related transactions should be delegated to Authorised Dealers so that there is no delay in execution of such projects abroad. Exports of some components of a product from a foreign country to another foreign country are being made whereas the main product is physically exported from India. In order to avoid delay in transportation and to meet the urgent requirement of project execution, the purchase order is raised on the supplier from India and the goods are directly sent from the supplier to the project site abroad. In these cases, approval is required to be taken from RBI for raising a purchase order on such third country exports on a case-to-case basis causing delay and inconvenience, he explained.
FIEO Director General Mr. Ajay Sahai during his address referred to many other issues concerning export credit. He said: "The overall credit exposure to the SME sector by the public sector banks grew to 25.81% in the year 2006-2007 (in value terms Rs.1,84,589 crore) surpassing the minimum 20% year-on-year growth. While this is in line with the policy package announced by the Parliament in August 2005 (for doubling the flow of credit by 2009-2010 within a period of 5 years), there are various issues that need to be considered,"
Referring to cost of credit, FIEO DG said besides the differential of 4-5% in the cost of credit between India and other competing countries, the other factors that add to the cost of credit include - penalties levied on sight and usance bills; loss due to fluctuation in exchange rates normally borne by the exporter at the time of crystallization of overdue export bills despite RBI directive to all public sector banks to debit or credit the customer with foreign exchange fluctuation at the time of de-linking (or crystallization); processing charges levied by the banks at the rate of 0.167% per month in addition to the RBI prescribed rates of interest at LIBOR+1%.
Earlier PCFC was being provided at LIBOR+0.75% and the Federation as a member of the Working Group constituted to review Export Credit had agreed in the meeting held on May 9, 2005 that the ceiling on PCFC/EBR could be raised to LIBOR+100 basis points provided the banks did not levy any other service charge. However, said Mr. Sahai, at present with the increase in LIBOR itself, which is as high as 5.25%, the additional charges at 0.167% per month are levied as processing charges by some banks adding substantially to the transaction cost of exports.
Suggesting how to make Gold Card Scheme more effective for status holders, Mr. Sahai said the Gold Card Holders should be allowed to open bank accounts anywhere in the world in the correspondent banks of the Indian Bank(s) of concerned exporter or they should be allowed to issue foreign currency cheques for various requirements pertaining to export business. Besides, waiver of service charges for processing in the case of renewal of limits where there is no change in the sanctioned limits etc., should be considered, he added.
In order to facilitate warehousing abroad and setting up of Display-cum-Workshop Centres outside India to meet the just in time delivery schedules, Mr. Sahai said the RBI should issue guidelines to banks to adopt a liberal approach in financing export consignments to untapped markets in the Middle East, Africa, Latin America and Europe.
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"Status quo on lending rates may further erode export competitiveness" Reacting to the Monetary & Credit Policy announced on 29th January, FIEO President Mr. Ganesh Kumar Gupta said status quo on lending rates may further strengthen rupee and erode the competitiveness of export sector. Mr. Gupta said: "With the aggressive rate cut once again made by the Federal Reserve, the possibility of greater FII inflows (both in equity and especially in debt) and greater external commercial borrowings could escalate inflation. The significant interest rate differential would manifest itself in a surge in capital inflows resulting in the rupee appreciating further and subsequently impinging on competitiveness of exports." FIEO Chief added that while the RBI’s cautious stance of maintaining a status quo on basic parameters was well taken, rationalization of credit rates for the export sector was extremely critical at this stage when industrial growth had declined from 11% a year ago to 9.5% during the first half of 2007-08 and merchandise export had declined to 21.9% in US dollar terms as compared to 26.2% in the corresponding April-November period last year. Unfortunately, said Mr. Gupta, RBI did not exhibit the required boldness by reducing interest rate by about 75 basis points. President FIEO went on to say that there has been a dramatic appreciation in currency over the last two years on a tide of huge global liquidity which has reduced export margins. He said it is estimated that India in the fiscal year 2007 has suffered losses of 2% of its GDP due to high foreign exchange reserves (in US $) invested mainly in low yielding US Government’s bonds. In this context, said Mr. Gupta, the Government should have considered apportioning low cost dollar loans to SME export sector either by setting up a hedging fund as done by Philippines or by creating a sort of ‘Exchange neutralization Fund’. Quoting ESCAP Report "Key Economic Development & Prospects in the Asia Pacific Region 2008," Mr. Gupta said the government should offer a customized package to small and medium exporters. The Report says: "Weakening demand in the United States has had an adverse impact on exports and import volume; growth in the United States is expected to drop significantly and the subprime crisis is bound to have its effect on economies in South Asia." The Report also states that the impact of currency appreciation has been greatest in typically low technology intensive manufacturing sectors that have low import content, creating an adverse impact on labour intensive sectors like textiles, agri and agri based commodities, leather, handicrafts, etc. |
Mr. Sahai further said the concessional interest for pre-shipment credit for 360 days should be made applicable from the date of shipment of the consignment to the date of sale; while in case of post-shipment credit, the concessional interest should be made applicable from the date of sale from the warehouse to the date of receipt of the payment. "Such a step will lead to a quantum jump in India’s exports to the US and other developed countries," he remarked.
About Procedural simplification, FIEO DG said for exporters located in far flung areas, at present, the negotiable set of shipping documents are routed through shipping agent, exporter, exporter’s bank, negotiating bank and buyer’s bank. Often goods reach before the original documents reach buyer’s bank. In such cases, goods start incurring demurrage and the buyer suffers due to non-availability of goods. Suggesting an alternative, he said the shipping agents should send the original (negotiable) shipping document to the buyer’s bank immediately upon shipment of the goods and a confirmation in writing of this compliance should be sent which would form the part of term of L/C for negotiation purpose.
For financing SME sector, Mr. Sahai mooted cluster based approach saying this would enable focused financing in industrial clusters and at the same time mitigate the risk of the bankers. He urged that the RBI should issue guidelines for providing online credit to units in 388 clusters. At present only 149 clusters are covered under SIDBI schemes.
