Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit

Posted On - 23 October, 2024 • By - Yashita Muthamma

The Interest Equalisation Scheme (IES)[1] is a program that provides interest subsidies to exporters in India. It was implemented on 1st April 2015 to provide pre- and post-shipment export credit to exporters in rupees. At that time, global demand stagnated and credit terms grew longer, exporters were confronted with rising borrowing costs in their export cycles.

The government anticipated that by implementing this program, exporters would be able to adjust their prices and make their goods more competitive.

According to the scheme, the government finds the exporters who meet the eligibility requirement and pays them directly the interest equalisation amount they are entitled. This program, also known as the interest subvention export scheme for exporters, was specifically made to help the MSME market (initially, this scheme was made for period of 5 years).

Recent development on specific extensions or modifications to the IES has been officially announced from the Reserve Bank of India. In its latest circular (RBI/2023-24/124), dated February 22, 2024, the RBI announced the extension of the scheme until June 30, 2024. Several important updates were introduced:

Where it stated that the rate of interest equalization shall be 2% for Manufacturers and Merchant Exporters exporting under specified 410 HS lines and 3% to the MSME manufacturers exporting under any HS line.

Additionally, the government has recommended the following changes to the program:

1. Average interest rate:

    As of financial year 2023–2024, the banks that set the average interest rate for the loans covered by this program higher than the Repo Rate + 4% prior to subvention would be subject to the program’s limitations. Based on an evaluation conducted for financial year 2023–2024, the Director General of Foreign Trade (DGFT) will determine which banks violate the aforementioned clause. Such banks shall be restricted from participating in the scheme till they furnish an undertaking (in the format as enclosed in the Annex[2]) to DGFT. Any subsequent violations determined by DGFT could result in exclusion from the program.

    2. Cap on subvention amount

    In a given financial year, the yearly net subvention amount has already been capped at Rs 10 Cr per Importer-Exporter Code (IEC), and banks, trade, and industry have been informed of this by DGFT Trade Notice No.05, dated May 25, 2023. As a result, starting on April 1, 2023, all payments will be taken into account.

    In the previous circular it was stated that the extended IES would not be available to those beneficiaries who were availing of the benefit under any Production Linked Incentive (PLI) scheme of the Government.

    The Government has clarified in this regard that these recipients can also use the extended IES for segments other than those for which they have already received PLI benefits and recommended that banks acquire a Self-Declaration from exporters in accordance with the Annex’s structure under the IES. As of October 1, 2021, these clauses will be regarded as being in effect. The aforementioned circular’s other clauses will not be altered.

    To provide transparency and increased accountability in the administration of the Scheme, banks would necessarily furnish the following information when granting approval to the exporter:

    1. the prevailing interest rate;
    2. the interest subvention being offered; and
    3. the net rate being charged to each exporter,

    so as to ensure transparency and greater accountability in the operation of the Scheme.

    Conclusion:

    The Importer Exporter Code (IEC) is essential for exporters because it simplifies international trade by ensuring compliance with regulations, making it easier to access global markets, and streamlining customs procedures. It also helps in tracking and managing export data, which supports transparency and policy development. In short, it is a key tool for ensuring smooth export operations, maintaining legal standing, and promoting business growth in global trade.

    [1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/257IE85A5E419354C4226B855C5C7E949DF9F.PDF

    [2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12610&Mode=0#Annex