Exports play an important role in accelerating the economic growth of developing countries like India. In view of the important role played by exporters, several initiatives have been taken by Reserve Bank of India and Government of India. These initiatives have contributed to the impressive increase in our exports. Of the several factors influencing export growth, credit is a very important factor which enables exporters in efficiently executing their export orders. The commercial banks provide short term export finance mainly by way of pre and post-shipment credit. Export finance is granted in Rupees as well as in foreign currency.

In view of the importance of export credit in maintaining the pace of export growth, RBI has initiated several measures in the recent years to ensure timely and hassle free flow of credit to the export sector. These measures, inter alia, include rationalization and liberalization of export credit interest rates, flexibility in repayment/prepayment of pre-shipment credit, special financial package for large value exporters, export finance for agricultural exports, Gold Card Scheme for exporters etc. Further, banks have been granted freedom by RBI to source funds from abroad without any limit for exclusively for the purpose of granting export credit in foreign currency, which has enabled banks to increase their lendings under export credit in foreign currency substantially during the last three years.

RBI introduced the Export Financing scheme in 1968. The policy behind the scheme was to make short-term export finance available to exporters at internationally competitive interest rates while at the same time ensuring that the rates are well above the financing banks’ cost of finance for short-term loans of the same duration in the relevant currency. Under the scheme, banks extend working capital loans to exporters at pre and post shipment stages. The credit limits sanctioned to exporters is based upon the financing banks’ perception of the exporter's creditworthiness and past performance.

Export Financing may be denominated either in Indian Rupees or in foreign currency. For both types of pre-shipment financing, RBI sets a ceiling on the interest rate that banks may charge to borrowers under the scheme. Since RBI fixes only the ceiling rate of interest for export credit banks are free to fix lower rates of interest for exporters on the basis of their actual cost of funds, operating expenses and taking into account the track record and the risk perception of the borrower/ exporter.

The mid-term Review the Monetary and Credit Policy for the year 2002-03 had proposed deregulation of interest rate on rupee export credit in phases. Accordingly, while the interest rates for the second slab of export credit were deregulated with effect from 1 May, 2003 it was indicated that, with effect from a date to be announced later it would be considered whether the ceiling rates for the first slab should also be discontinued to encourage greater competition in the interest of exports.

Shri Y. V. Reddy, Governor, RBI desired that a Working Group consisting of Department of Banking Operations and Development (DBOD) and Monetary Policy Department (MPD) of RBI, banks and export organizations may be set up to quickly review the scheme of export credit and that the report of the Group should be placed in public domain for feedback.

The terms of reference of the Working Group were:

(i) Review of existing procedures for export credit

(ii) Review of action taken on exporters' satisfaction survey

(iii) Review of Gold Card Scheme

(iv) Review of export credit for non-star exporters; and

(v) Review of the current interest rate regulations in export credit

Accordingly, a Working Group was constituted under the Chairmanship of Shri Anand Sinha, Chief General Manager, in charge of Department of Banking Operations & Development, (DBOD) Central Office, Reserve Bank of India. The other Members of the Group consisted of Senior Officials from Monetary Policy Department of Reserve Bank of India RBI), State Bank Of India, Canara Bank, Federal Bank Ltd., Federation of Indian Exporters’ Organizations (FIEO), Engineering Export Promotion Council (EEPC) and All India Association of Industries (AIAI). The names of the Senior Officials who were nominated from the above Organizations/ Institutions are furnished in the Annex I to the Report

Three Meetings of the Group were held. The first meeting of the Working Group was held on April 19, 2005. The second meeting of the Working Group was held on April 25, 2005. The Group, based on the presentations made by the Representatives of the Export Promotion Organizations, discussions and study of the statistics and other relevant information made available during the course of the discussions, made the following observations and recommendations in respect of each of the terms of references.

1 Review of the existing procedure for export credit

The Group reviewed the existing procedures for export credit. After reviewing the procedures, members were of the opinion that existing procedures in place were adequate to take care of the interest of the exporters. The Export Promotion Organizations represented that they have been receiving complaints that the time frame prescribed by RBI for disposal of the applications for export credit is not complied with by many banks, especially in the case of small and medium exporters and exporters in smaller centers. Piecemeal queries were raised which resulted in delays in sanctioning / rejecting the loan applications from exporters. Non adherence to the set procedures and systems was more pronounced in the case of small and medium exporters who are expected to play a bigger role in the promotion of exports in the coming years.

The representatives of banks apprised that there has been improvement in the customer service to exporters specially the small and medium exporters. The incidence of delays in sanctioning the credit limits have been reduced. The Group was of the opinion that the procedures laid down were not adhered to by branch officials in disposing of the applications for credit limits in several cases. The Group felt that there should be attitudinal changes among the officials of the banks in dealing with small and medium exporters by strictly adhering to the procedures so as to ensure smooth flow of export credit to small and medium exporters.. While interaction between banks and exporters by way of seminars/meetings / workshops occur in major centers, it is not so in smaller centers. There was a suggestion by the export promotion organizations to arrange for such meetings with banks and small and medium exporters to sort out the differences and also educate the exporters about various formalities of banks. It was pointed out by RBI that the task of coordination for export promotion was given to SLBC which constituted sub-committees with a view to bringing in better coordination among banks and exporters. It was suggested that the export promotion organizations may interact at state level with the sub-committees and arrange for meetings/seminars etc to suitably educate and provide adequate and appropriate guidance to small and medium exporters to obviate the difficulties faced by them.

vii. State Level Export Promotion Committees which have been reconstituted as sub-committees of the SLBCs should play a greater role in promoting coordination between banks and exporters in the respective states and Export Promotion Organizations should take initiative in coordinating the meetings.

After the NCAER Survey Report was submitted in April 2002, a small Committee consisting of officers from RBI, banks and ECGC was constituted to impress upon the commercial banks about the need to bring about improvements in the credit delivery system on the lines suggested by NCAER. The Committee visited 13 centers viz.Mumbai, Bangalore, Kolkata, New Delhi, Jaipur, Cochin, Channai, Agra, Ahmedabad, Hyderabad, Guwahati, Tirupur and Mysore, accounting for major exports. Visits to these centers and discussions with bankers and exporters and Reports received from banks revealed that the suggestions made by NCAER have been by and large implemented by the banks. The representatives of FIEO and other export promotion organizations represented that the small and medium exporters continue to face certain irritants such as delay in sanctioning of credit, non–availability of PCFC , levying of service charges for PCFC, insistence on collateral security in all cases etc. and as such it cannot be said that the exporters are generally satisfied with the services offered by the banks under the various parameters chosen for conducting the satisfaction survey. Therefore, the representatives of export organizations. desired to have another survey conducted by eliciting the views of exporters in confidence.

After reviewing the experience of the committee after its visit to the various centers mentioned above and also the presentations made by the Export Promotion Organizations, the general consensus of the members of the Group was that since the last survey, there has been considerable improvement in the delivery of export credit and the services rendered by the banks. The Group was also of the opinion that there is need to look into the grievances of the Small and Medium Exporters and as such there is need to have a fresh 'satisfaction Survey'.

RBI may consider getting a fresh survey conducted by an external agency regarding the satisfaction of the exporters with the services rendered by banks.

The Group reviewed the implementation of the Gold Card Scheme announced by RBI in May 2004.The position regarding issue of Gold Cards to eligible Exporters under the Scheme approved by RBI/Govt. of India by reporting banks as on 25 April 2005 was as under:

The Group observed that while some banks like State Bank of India , Canara Bank, Bank of India, Punjab National Bank etc. had made progress in issuing Gold Cards to eligible exporters, some banks could not show much progress. While large corporate exporters have been getting the benefits spelt out in the Gold Card Scheme in normal course, the Gold Card Scheme would immensely benefit the small and medium exporters.

The reasons for tardy progress in implementation of the scheme were attributable to –

i) Some banks were of the view that there may be pressure on the banks to extend the benefits to large number of borrowers whose credit risk could not be assessed properly.

ii) The procedure laid down by some banks by calling for information in lengthy forms was found cumbersome by exporters in giving the information.

iii) Some banks have prescribed lengthy forms, running into pages. It was highlighted that the procedure adopted by some banks viz. SBI and Canara Bank with regard to issue of gold cards was exemplary. They have devised simple application forms. Further, even without the individual exporters having to apply for the card, these banks assess the performance and track record of the exporters and issue gold cards to eligible exporters suo moto and the progress in issue of cards is monitored at Board level.

iv) As per para 3.4.3 of the Gold card scheme, banks were advised to consider exempting Gold Card holders from the Packing Credit Guarantee Sectoral Scheme of ECGC, in view of their credit worthiness It was represented by FIEO that many banks had not implemented the same causing additional burden to Small and Medium borrowers and also others.

v) The representatives of banks stated that banks in general were of the opinion that this was only an advice and not mandatory and should be left to banks themselves to decide the issue. As this facility is given to Gold Card holders, it was also felt that the issue of Gold Cards was not speeded up since the holders would have to be exempted from covering under the ECGC scheme. There was a suggestion from the representatives of FIEO and other Export promotion organizations that the insurance fee should be borne by the banks themselves and should not be charged.

After detailed discussions and considering the various representations the following recommendations were made;

i. Since the number of Gold cards issued by banks is low. banks may be advised to speed up the process of issue of the Cards to all the eligible exporters especially the SME exporters and ensure that the process is completed within a period of three months .

ii. Simplified procedure for issue of Gold Cards as envisaged under the scheme should be implemented by all banks. IBA should look into the matter and devise a simplified format in consultation with banks. Information/ particulars already available with the banks may not be called for from the exporters.

iii. Banks may consider implementing the instructions at para 3.4.3 of the Gold Card scheme regarding exempting all deserving Gold Card holder exporters from the Packing Credit Guarantee—Sectoral schemes of ECGC , on the basis of their track record.

The Group noted that while reportedly the large corporate exporters receive very good treatment in terms of service and interest rates, the small and medium exporters do not get the same treatment . Small and Medium Exporters find it difficult to sort out their problems.

• Banks should post nodal officers at Regional/Zonal Offices and major branches having substantial export credit for attending to the credit related problems of SME exporters

Exporters' organizations held the view that wherever interest rates have been freed, the small exporters have been at disadvantage while large corporate exporters get the benefit. It is practically very difficult for exporters to shift from one bank to another bank which charges lower rates of interest. As a result they are unable to take advantage of the competition among banks in lowering the interest rates. Therefore, the present interest rate prescription by RBI for the first slabs of the Rupee export credit (both pre and post shipment) should continue.

i. The working group recommends that the present interest rate prescription by RBI may continue for the time being in the interest of the small and medium exporters.

ii. The interest rates prescribed by RBI are ceiling rates. Since the banks are at liberty to charge lesser rates of interest, taking into account the cost of funds, margin requirements, risk perception etc, banks should try to extend export credit at rates lesser than the ceiling rates prescribed by RBI.

The Working Group reviewed the position of export credit in foreign currency, in view of the comments of exporters that banks were not sufficiently meeting the their demand for export credit in foreign currency

Analysis of the export credit statistics revealed that there has been substantial increase in the export credit in foreign currency during the last three years. Since June 2002 while the quarterly disbursement of export credit in Rupees has declined , the disbursement of export credit in foreign currencies has registered sharp increase by more than ten times as shown below:

* provisional figures

Similar is the case with outstanding in export credit also as shown below.

* provisional figures

PCFC outstanding, which was just 5% of the rupee export packing credit outstanding as at the end of June 2002 had grown to about 50% by September 2003. As at the end of September 2004, the PCFC outstanding has exceeded the Rupee packing credit outstanding.

However, while demand for export credit in Rupees is low, there is persistent demand for more export credit in foreign currency in view of the cost advantage over the export credit in Rupees and arbitrage opportunity.

The Group observed that eventhough there has been substantial increase in the volume of export credit in foreign currency during the last three years, there still was unsatisfied demand.

In view of the limited foreign exchange resources of banks (FCRN-B, EEFC, RFC etc) RBI has permitted banks to avail of lines of credit from abroad without any limit exclusively for the purpose of extending export credit in foreign currency. Most of the banks have availed of this facility. It was observed that while few banks were extending export credit in foreign currency entirely out of their deposit funds, some banks were meeting the same fully out of overseas borrowings. Many banks had a mix of the different sources of funds viz. deposit funds, borrowings from abroad and swap funds. Substantial portion of the export credit in foreign currency was met by borrowings from abroad. From a prudential point of view it was felt that there was a need to have a regulatory limit up to which banks may be allowed to borrow from abroad for this purpose.

It was brought to the notice of the Group that some banks are stated to be levying service charges upto 2% of the amount of export credit in foreign

currency lent in addition to the interest rate ceiling prescribed by RBI.

In respect of Gold Card holders, banks are levying service charge at a flat rate of 0.1% on CIF value instead of the funds lent as provided at para 3.4.2 of the Gold Card Scheme. However since this service charge is levied by banks per transaction, the annualised service charge levied works out to much higher than the prescribed rate of 0.1%. It is proposed at item (ii) of the recommendations below that banks will not charge this service charge in view of the proposed increase in the interest rate ceiling on foreign currency lending for export credit out of inter-bank foreign currency borrowings /funds borrowed from abroad . This will tantamount to modification of para 3.4.2 of the Gold Card Scheme, for which concurrence of the Ministry of Commerce, GOI may be obtained since the clause was included in the scheme as desired by the Ministry of Commerce.

i. In respect of export credit in foreign currency, the interest rates may be raised by 25 basis points,( i.e. LIBOR + 1.00% for the first slab and additional 2% for the second slab) , subject to the express condition that the banks will not levy any other charges in any manner under any name viz. service charge , management charge etc except for recovery towards out of pocket expenses incurred.

ii. Since implementation of the above recommendation will tantamount to modification of para 3.4.2 of the Gold Card Scheme, concurrence of the Ministry of Commerce, GOI may be obtained.

iii. Levying of other service charge linked to the amount lent is not in order and should not be done by banks.

iv. Banks should give priority for the foreign currency export credit requirements of exporters over foreign currency loans to non-exporter borrowers.

Constitution of the Working Group :

Chairman:

Shri Anand Sinha, Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India

Members :

1. Dr. Himanshu Joshi, Director, Monetary Policy Department, Reserve Bank of India

2. Shri G.K.Gupta, Vice President, Federation of Indian Exporters' Organisations

3. Shri P.R.Venkatachalam, Deputy Chairman, Engineering Export Promotion Council

4. Shri Bose K. Nair, Deputy Director, World Trade Centre (representing AIAI)

5. Shri A.P.Verma, General Manager, International Banking – Domestic, State Bank of India

6. Shri M.S.Nayak, General Manager, Canara Bank

7. Shri C. Sreekumar, Deputy General Manager, The Federal Bank Ltd.