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India's government is actively working to alleviate the financial constraints faced by its Micro, Small, and Medium Enterprises (MSMEs) involved in exporting goods. The recent decline in India's goods exports, experiencing a nearly 1% drop in December, marking the second consecutive month of decrease, has underscored the urgent need for improved financial support for this critical sector. The government's strategy centers on introducing alternative financing models, focusing on providing collateral-free pre-shipment loans to bolster the competitiveness of Indian exporters in the global market. This initiative is a key component of the budget's proposed Export Promotion Mission, aimed at streamlining access to capital for MSMEs and injecting much-needed vitality into the country's export sector.
A cornerstone of this plan is the expansion and improvement of export factoring services. This involves financial institutions purchasing an exporter's short-term foreign accounts receivable for cash, at a discount, thus assuming the risk of payment from the foreign buyer. This process significantly improves the exporter's cash flow, allowing them to manage working capital more effectively and bid on new opportunities without being hampered by extended payment cycles. The government is exploring various models of export factoring, including reverse factoring, and is engaging in discussions with key stakeholders, including the Factoring Association of India, to identify and address any potential challenges or hurdles in implementation. The goal is to create a robust and accessible factoring system within India, making it a competitive alternative to existing services offered by foreign entities, such as those currently utilized by Indian exporters in Singapore.
Beyond export factoring, the government is also leveraging other mechanisms to improve access to credit for MSME exporters. The promotion of the Account Aggregator framework is a key element, aiming to simplify and streamline the process of credit assessment and approval. Additionally, the government is emphasizing trade credit insurance to mitigate the risks associated with international trade transactions and encourage more participation from lenders. The existing credit guarantee scheme is being reinforced, guaranteeing loans up to ₹20 crore per borrower for export-oriented units (EOUs) of MSMEs, as well as units focused on import substitution. This guarantee provides lenders with greater confidence, potentially leading to lower interest rates – a crucial factor in ensuring the viability and sustainability of these loans. The government has allowed lenders to implement board-approved policies regarding interest rates and loan limits, encouraging greater flexibility in lending decisions.
Collaboration between various governmental ministries is crucial for the successful implementation of these initiatives. The ministries of commerce and industry, finance, and MSME are working together to establish clear sectoral and ministerial targets, and to ensure the efficient and effective disbursement of these collateral-free pre-shipment loans (also known as packing credits). These loans are intended to finance the procurement, manufacturing, and packaging of goods before shipment, effectively managing the operational cash flow and smoothing out the inherent inefficiencies in the traditional financing models. The provision of packing credit also constitutes vital working capital assistance, enabling businesses to operate without the immediate pressure of short-term funding gaps.
However, challenges persist. The cost and conditions surrounding existing factoring services within India are acknowledged as factors that need attention. Ajay Sahai, Director General of the Federation of Indian Export Organisations, points out that the current cost of factoring services in India is significantly higher than those available in Singapore (10-11% cheaper). This highlights the necessity for addressing the cost-effectiveness and ease of accessing factoring services to truly level the playing field and enhance the competitiveness of Indian MSMEs in the international market. Addressing interest equalization benefits is also important. The integration of units focusing on import substitution into the credit guarantee scheme, planned for a later stage, will further broaden the reach and impact of these initiatives, stimulating both export growth and import reduction within the country.
In conclusion, the Indian government's comprehensive plan to provide alternative financing models to its MSME exporters represents a significant step towards strengthening its export sector and fostering economic growth. By focusing on collateral-free pre-shipment loans, the expansion of export factoring services, and the utilization of the Account Aggregator framework and trade credit insurance, the government aims to mitigate the financial barriers hindering the success of these crucial businesses. The ongoing dialogue and collaboration with relevant stakeholders, including the Factoring Association of India, demonstrates the government's commitment to creating a sustainable and supportive ecosystem for its MSME exporters, thereby fostering greater economic competitiveness and prosperity in the global marketplace. The long-term success of this initiative hinges on careful implementation, addressing cost concerns, and ensuring ease of access to these new financing options. The objective is to not only improve liquidity for existing businesses but to incentivize entrepreneurship and encourage new entrants into the export sector, ultimately contributing to a stronger and more resilient Indian economy.
Source: Govt plans alternative financing plans for MSME exporters