Export Credit Finance Limits

Export Credit limits is provided by the banks in India in the form of Pre-Shipment Credit and Post Shipment credit. These financing lines are provided to boost the Exports of the country. I had mentioned about these limits earlier (Pre-shipment Credit / Post-Shipment Credit). The limits are extended for a maximum period of upto 360 days (preshipment) and 365 days (postshipment).

Although the interest rate to be charged in these lines are not controlled/capped by RBI (which was the case in the past i.e. upto June 30, 2010), schemes are intended to facilitate financing to the Exporters at internationally comparable rates. 

RBI provides facility to banks for getting refinanced (upto 32 percent of the Outstanding) their Rupee Export Credit Finance portfolio for a maximum period of 180 days, thereby the loss (of margins) of deployment of funds [i.e upto 32 percent (reduced from 50 per cent to 32 per cent in June 2014)] by banks at subsidized interest rate (at Repo Rate under LAF; The World of Regulatory Rates) under these lines, is passed on to the RBI. This way the banks funds (upto 32 per cent of the Export Credit portfolio) gets unlocked, and banks can redeploy the same for generating better margins.

Although, as per RBI guidelines, the Export Credit limits should be excluded for bifurcation of the working capital limit into loan and cash credit components, generally it is observed that Export Credit limits are sanctioned by banks as part of umbrella Working Capital (WC) limits. Many times, the Export Credit limits are set as inner limit or sub limit to Cash Credit (CC)/Fund Based (FB) WC limits.

The system of Cash Credit limit requires the borrower to submit Stock & Receivable Statement based on which Drawing Power is arrived. In case, the Export Credit limits are sanctioned as inner limit to the CC limit, the Export Credit limit will also fluctuate depending on the DP arrived based on Stock & Receivable Statement. It may be observed that while the CC limit is based on MPBF (i.e under Eligible WC Limit method) arrived taking into account the Current Assets, Current Liabilities and NWC, the Export Credits limit needs to be arrived taking into account Export Orders of the borrower. It may be mentioned that while calculating the minimum required NWC, the Export Receivables are excluded from the Current Assets i.e. benefit is provided to Exporters for facilitating the 100% Export Finance. The practice of associating the Export Credit limit with the umbrella WC limit many a times leads to inappropriate assessment/management for Export Credit limit if the intention is to promote Exports from the country by providing Export Credit Finance.

RBI guidelines mention that for creditworthy Exporters, banks should calculate the need based Export Credit limit taking into account the anticipated Export turnover and track record of the Exporter. Banks should adopt any of the methods, viz. Projected Balance Sheet method, Turnover method or Cash Budget method, for assessment of working capital requirements of their Exporter-customers, whichever is most suitable and appropriate to their business operations.

In light of the above and considering RBI’s thrust on extending the Export Credit Finance for supporting the Exports of the country, there needs to be a Standard approved mechanism with clarity for arriving/calculating the limits and DPs for Export Credit Finance which may be followed by all the banks. This would standardize the system of Export Credit Finance to the Exporters.