New Delhi is working on a new collateral-free, pre-shipment loan scheme for small and medium enterprise (SME) and ecommerce exporters in order to achieve the ambitious target of $2 trillion in exports by 2030, according to officials familiar with the matter.
While the details are still being finalized, the government is currently in discussions with financial institutions and the RBI to create a scheme that will provide collateral-free loans to exporters to cover the costs associated with producing goods, based on their past performance. The main objective is to expand export credit, introduce new financing options, and lower interest rates for these exporters, an official revealed.
Pre-packaging loans are typically granted to finance the purchase of raw materials, labor, manufacturing, and packing of goods before shipment. This working capital guarantee product is essential for MSME and ecommerce exporters, many of whom are currently experiencing financial challenges.
Currently, only 15% of SMEs’ credit needs are met by formal channels, despite these firms accounting for 57% of the country’s production, as per the Federation of Indian Export Organizations (FIEO). Most banks require collateral for lending to this segment, resulting in high interest rates.
A draft report has already been prepared, and discussions are ongoing between the Department of Financial Services and the Department of Commerce to finalize the structure and seek approval from the RBI with inputs from other financial institutions.
The proposal is particularly timely as India’s goods exports only saw a modest 0.5% increase year-on-year in September following two months of contraction. Ecommerce exporters are particularly struggling with trade finance procedural issues.
The new provisions aim to address these challenges by extending credit based on track record rather than specific orders. This approach allows lenders to assess the exporters’ previous performance, reducing the need for collateral. Additionally, the recent increase in insurance cover for banks up to 90% for working capital loans and the reduction in premium costs for the MSME sector are expected to further facilitate lending.
Furthermore, discussions are underway to establish a more effective working capital guarantee program to meet the significant unmet need for working capital among MSMEs.
