Executive Summary:
The Reserve Bank of India (RBI) has issued a notification extending the Interest Equalization Scheme (IES) for pre- and post-shipment Rupee export credit up to June 30, 2024. It maintains interest equalization rates of 2% for Manufacturers and Merchant Exporters exporting under specified 410 HS lines and 3% for MSME manufacturers exporting under any HS line, while introducing modifications regarding average interest rates and subvention amount caps. Banks exceeding the Repo Rate + 4% average interest rate prior to subvention may face restrictions and must submit an undertaking to the DGFT.
Key Points / Main Content:
Extension of Interest Equalization Scheme:
* The Interest Equalization Scheme is extended until June 30, 2024.
Interest Equalization Rates:
* 2% for Manufacturers and Merchant Exporters exporting under specified 410 HS lines.
* 3% for MSME manufacturers exporting under any HS line.
Modifications to the Scheme:
* Average Interest Rate:
* Banks with average interest rates exceeding Repo Rate + 4% prior to subvention may face restrictions.
* DGFT will identify banks in breach for FY 2023-24.
* Breaching banks must submit an undertaking to DGFT to continue participating.
* Further breaches may lead to debarment from the scheme.
* Cap on Subvention Amount:
* The annual net subvention amount is capped at Rs 10 Cr per Importer-Exporter Code (IEC) in a financial year, effective April 1, 2023.
Other Provisions:
* All other provisions of the previous circulars remain unchanged.
Impact Analysis:
Scheduled Commercial Banks (excluding RRBs), Primary Urban Cooperative Banks, State Cooperative Banks scheduled banks having AD Category-I license, and Exim Bank:
* Impact: Banks need to adhere to the extended IES, revised guidelines regarding average interest rates, and subvention amount caps. Banks that priced loans covered under this scheme at an average interest rate of greater than Repo Rate + 4% prior to subvention would be subjected to certain restrictions under the scheme.
* Action Required: Banks must ensure compliance with the Repo Rate + 4% average interest rate condition, and those in breach must furnish an undertaking to DGFT. Banks must also adhere to the Rs 10 Cr cap on the annual net subvention amount per IEC.
Directorate General of Foreign Trade (DGFT):
* Impact: DGFT is responsible for identifying banks in breach of the average interest rate provision and monitoring compliance.
* Action Required: DGFT needs to assess banks' average interest rates for FY 2023-24, identify banks in breach, and manage the undertaking submission process.
Exporters (Manufacturers and Merchant Exporters, MSMEs):
* Impact: Exporters can continue to avail of the interest equalization benefits at the specified rates until June 30, 2024, subject to the subvention cap.
* Action Required: Exporters should be aware of the Rs 10 Cr annual net subvention cap per IEC.
Key Entities Referenced
Interest Equalization Scheme: A scheme by the Government of India to provide interest equalization for pre and post shipment rupee export credit.
Scheduled Commercial Banks: All Scheduled Commercial Banks excluding RRBs, Primary Urban Cooperative Banks, State Cooperative Banks scheduled banks having AD category-I license, and Exim Bank.
Government of India: The governing body that has allowed for the extension of the Interest Equalization Scheme.
Directorate General of Foreign Trade: An organization responsible for identifying banks in breach of interest rate provisions and monitoring compliance with the Interest Equalization Scheme.
MSME: Micro, Small and Medium Enterprises. Manufacturers exporting under any HS line and eligible for 3% interest equalization under the scheme.
Repo Rate: Benchmark interest rate used to assess bank loan pricing under the Interest Equalization Scheme. Banks pricing loans above Repo Rate + 4% may face restrictions.
Exim Bank: Export-Import Bank of India, excluded from the definition of Scheduled Commercial Banks in the context of this circular.
Ministry of Commerce and Industry: Government ministry associated with the Directorate General of Foreign Trade.
RBI/2023-24/124
DOR.STR.REC.78/04.02.001/2023-24 February 22, 2024
All Scheduled Commercial Banks (excluding RRBs),
Primary (Urban) Cooperative Banks & State Cooperative Banks (scheduled banks having
AD category-I license), and Exim Bank
Dear Sir / Madam,
Interest Equalization Scheme (IES) on Pre and Post Shipment Rupee Export Credit
Please refer to the instructions issued vide circulars No. DOR.STR.REC.93/04.02.001/2021-
22 dated March 8, 2022 and DOR.STR.REC.39/04.02.001/2022-23 dated May 31, 2022.
2. Government of India has allowed for extension of the Interest Equalization Scheme for
Pre and Post Shipment Rupee Export Credit (‘Scheme’) up to June 30, 2024. 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.
3. Further, Government has advised the following modifications to the scheme:
a) Average interest rate: With effect from FY 2023-24, the banks which have priced
the loans covered under this scheme at an average interest rate of greater than Repo
Rate + 4% prior to subvention would be subjected to certain restrictions under the
scheme. Based on an assessment undertaken for FY 2023-24, Director General of
Foreign Trade (DGFT) will identify the banks which are in breach of the above
provision. Such banks shall be restricted from participating in the scheme till they
furnish an undertaking (in the format as enclosed in the Annex) to DGFT. Any further
breach as assessed by DGFT thereafter may lead to debarment from the scheme.
b) Cap on subvention amount: The annual net subvention amount has been already
capped at Rs 10 Cr per Importer-Exporter Code (IEC) in a given financial year and
the same has been communicated to the trade & industry and banks vide DGFT
Trade Notice No.05 dated May 25, 2023. Accordingly, all disbursement from April 1,
2023 shall be reckoned for this purpose.
4. All other provisions of the aforesaid circulars shall remain unchanged.
Yours faithfully
(Vaibhav Chaturvedi)
Chief General ManagerAnnex
UNDERTAKING
We, [Name of the Bank], hereby provide an undertaking to participate in the Interest
Equalisation Scheme for MSMEs and non-MSMEs, subject to the following terms and
conditions:
1. We understand that if our bank's average interest rate prior to subvention for
MSMES and non-MSMEs is higher than Repo Rate + 4%, we will be debarred under
the scheme.
2. We agree that we will keep the average interest rate within Repo Rate + 4% band
to continue to participate in the Interest Equalisation Scheme.
3. We hereby undertake to provide all necessary information and documents as
required by the Directorate General of Foreign Trade, Ministry of Commerce &
Industry for the purpose of monitoring and evaluation of our compliance with the
terms and conditions of the Interest Equalisation Scheme.
4. We also agree to adhere to any other guidelines or directives issued by the
Directorate General of Foreign Trade, Ministry of Commerce & Industry from time to
time.
We hereby certify that we have read and understood the above terms and conditions and
undertake to abide by them in letter and spirit.
Signature of authorized signatory:
Name of authorized signatory:
Designation:
Name of the Bank:
Date:
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