The Reserve Bank of India (RBI) is taking into account the request from exporters to establish a sub-target for export credit within the existing 40 percent target for priority sector lending (PSL). This move aims to ensure improved credit flow to the export sector, which has been experiencing a cash crunch due to disruptions caused by the Red Sea crisis.
The Federation of Indian Export Organisations (FIEO), representing exporters, has proposed to the Commerce Department that approximately 5-6 percent of priority sector lending should be earmarked for the export sector. The purpose of this allocation is to help exporters meet their increased need for credit, resulting from longer shipping times and payment delays.
Ashwani Kumar, President of FIEO, highlighted that this proposal aligns with the 7.5 percent sub-target already set for Micro, Small, and Medium Enterprises (MSMEs) within the 40 percent of PSL.
Challenges Faced by Exporters
Exporters are encountering various challenges due to the Red Sea crisis and its implications. The diversion of cargo through the Cape of Good Hope, resulting from Houthi attacks in the Red Sea triggered by Israel’s war on Palestine, has led to longer voyage times. Additionally, slow offtake and delayed payments from buyers have necessitated higher credit for longer durations. Exporters require additional credit at competitive rates to address these issues effectively.
While exports are already included in the PSL list, this inclusion does not guarantee increased credit flow, according to an industry source. The source stated that banks are required to allocate 40 percent of their credit to specified sectors under the PSL framework. Therefore, if a bank is meeting its target by allocating more resources to education, for example, it may not be inclined to lend to exporters. To address this, exporters are advocating for a specific allocation of about 5-6 percent of priority sector lending to the export sector.
Additional Demands from Exporters
Exporters are also advocating for an increase in the rate of interest subvention or subsidy under the interest equalisation scheme. This request comes in response to the recent increase in bank interest rates. Ashwani Kumar proposed restoring the interest subvention to 3 percent for 410 tariff lines (up from 2 percent) and 5 percent for MSME manufacturers (up from 3 percent) to provide competitive interest rates.
Decision-Making Process
While the Commerce Department understands the challenges faced by exporters, any final decision on the matter will need to come from the Finance Ministry and the RBI. The source emphasized that the Commerce Department is aware of the extended voyage times to Europe and the subsequent delayed payments, which are depleting exporters’ financial resources. However, the ultimate decision-making authority lies with the Finance Ministry and the RBI.