The Commerce Department is taking proactive measures to address the ongoing credit issues faced by exporters, particularly smaller businesses.
With banks and the Reserve Bank of India (RBI) seeming passive in the face of mounting financial challenges, the department is exploring the establishment of a credit guarantee fund for export finance.
This initiative, modelled on the post-COVID loan package, aims to liberate exporters from the burden of collateral requirements, thereby making access to finance significantly easier.
Exporters have reported a troubling decline in export credit, with outstanding credit plummeting from approximately Rs 2.3 lakh crore at the end of March 2022 to below Rs 2.2 lakh crore by March 2023. This decline persists despite a notable 15 per cent increase in exports in rupee terms over the same period.
As freight costs continue to surge due to geopolitical tensions in West Asia, the financial strain on exporters has intensified, compelling them to seek more affordable financing solutions.
Consulting firm EY has been enlisted by the Directorate General of Foreign Trade (DGFT) to conduct a comprehensive analysis of the exporters’ financial landscape and to evaluate potential remedies. The goal is to develop a multi-faceted strategy to tackle the various financial hurdles that exporters encounter.
A critical observation is that the Export Credit Guarantee Corporation (ECGC), the primary provider of export credit insurance, has not kept pace with the growing needs of businesses .
Currently, ECGC’s coverage ranges between USD 80 to USD 90 billion, while the estimated requirement for merchandise exports is approximately USD 450 billion. Policymakers are beginning to question the efficacy of ECGC’s monopoly and suggest a possible review of its operations.
Additionally, there is a consensus that factoring—a financial practice that allows businesses to sell their accounts receivable to a third party for immediate cash—should be more widely utilised.
Despite its potential to address cash flow challenges, factoring remains underused in the export sector.
The government’s initiative to tackle these credit-related concerns is timely and essential for ensuring the viability of the export sector.
With the backdrop of rising costs and fluctuating global trade dynamics, the proposed credit guarantee fund could prove pivotal in safeguarding the interests of exporters, enabling them to sustain and grow their businesses in challenging economic conditions.