Small firms find it hard to get export finance. Relief may be on way. #IndiaFinance

Smaller enterprises struggling to crack export markets, especially in some of the poorest countries, may find it easier in the future, with the Exim Bank of India working on a model to smoothen export finance for them.

Indian lenders, unsure of importers and banking systems in so-called least developed countries (LDCs), are often hesitant to fund Micro, Small and Medium Enterprises (MSMEs)shipping to such nations. The Centre has now asked Exim Bank to design a model to assess the risks faced by banks involved in such exports and finance them, two people aware of the matter said. The model will aim to promote exports by MSMEs and protect them from payment defaults.

According to one of the two officials cited above, MSME exporters face a twin problem of availability and cost of finance. While the government’s 3% interest subsidy for MSMEs brings down loan costs, availability of finance itself remains a problem.

“Suppose somebody is exporting to an African country which is not politically stable—Banks will be slightly hesitant to fund it unless you give good collateral since you are taking a risk on the customer who is abroad. But here in India, my bank is taking an exposure for the manufacturer here. If the money is stuck there, we don’t know about their banking systems and their legal issues. These are challenging. How you manage those kind of risks is what we are trying to do through Exim Bank,” the person said on the condition of anonymity.

Broader issue

However, industry experts said the issue is not limited to the least developed countries.

“In the Middle East, I know at least 100 Indian entrepreneurs who lost money in exporting because the people said that they were going to give you 25% advance and then once the products reach, they didn’t give that,” said Vinod Kumar, president of India SME Forum.

Lack of timely and adequate credit at reasonable interest rates is one of the key problems faced by India’s 26 million MSMEs which employ about 60 million, and contribute about 45% of the manufacturing sector output and 40% of exports. The key reason is that banks see these as high-risk loans, and demand collateral which may not be readily available.

The government has asked Exim Bank to create a product to assure Indian banks financing MSMEs, the second person said. Since Exim Bank has linkages with numerous banks, it will be able to assess if a certain bank in a foreign country is risky and whether it can make the payment on behalf of the buyer from that country. On the basis of the risk assessment, Exim Bank can provide a guarantee to the Indian bank, and will take care if a payment risk arises. However, this guarantee may not be 100%, the person added.

“It is under discussion, and Exim Bank is in the process of defining and designing it. Ultimately, we will run it through the commerce ministry. It is more of Exim’s product through which we want to push banks,” the second person added.

Queries sent to spokespersons and secretaries of MSME and commerce ministries, financial services department and Exim Bank remained unanswered at press time.

Exporters face issues

According to the first person, Indian MSME exporters face other issues as well, including availability of power, labour, containers, linkages with the ports, timely completion of approvals and refunds. “All these things put together, exporters may be hit by around 10-12%. That is the one which you have to attack from a procedure perspective,” the person said.

According to Kumar of India SME Forum, while large companies may be able to afford the steep cost of finance in India, smaller ones can’t. In many countries, interest rates are not higher than 4%, he added. “Majority of the entrepreneurs normally operate between 2% to 7% of margins. If that margin goes away due to costly finance, there is no stability in the enterprises. That is why enterprises can even shut down because they have no reserve,” he said. The Export Credit Guarantee Corp. caters only to guaranteeing the loans that have been taken, he added.

It is equally important to grow the pool of exporting MSMEs, and promote their goods in countries with the highest potential, rather than allowing MSMEs to tap markets with high risks, he added.

“What is very important is that every MSME has to be made aware that nothing should be sent from the country unless there is a sustainable letter of credit which the exporter should have, without which they should not send to anybody. It’s also a matter of making MSME aware that they should not send material outside the country unless they have received the full amount,” Kumar added.