Government of India has extended Interest Equalisation System

Tags: Economics/Business

To boost the export from the country ,the government of India has extended the “Interest Equalisation Scheme for Pre and Post Shipment Rupee Export Credit (‘Scheme’)” up to March 31, 2024 or till further review, whichever is earlier. The extension takes effect from October 1, 2021 and ends on March 31, 2024.

• The scheme was announced by the government of India in April 2015 and has been extended from time to time.

• Under the scheme the interest equalisation rates for the large Micro Small and Medium Enterprises (MSME) manufacturers and exporters under any Harmonized System (HS) will be 3% and two per cent for manufacturer exporters and merchant exporters exporting under 410 HS lines (after excluding 6 HS lines of the telecom sector).

What is the Interest Equalisation scheme

The scheme includes  both Interest subsidy  and reimbursement.

How it works 

• Banks in India have the power to decide  the interest rates on loans .

• Suppose SBI loan rate is 9% and it provides loans to the eligible  exporters at  9 %  interest rates . Suppose the exporters come under a 3% interest equalisation scheme. Then the banks will provide the loan at 9% and later will credit the subsidy amount of 3% in the exporter accounts.

• Effectively the exporter gets the loan at 6%. Here the interest subsidy is 3%.

• Then the SBI will approach the Government of India with proper documents and claim the interest subsidy of  3% from the government . The government will reimburse the SBI . Thus the bank will get its money with no loss and the exporter will get a loan at a cheaper rate which will help in boosting exports from India . 

• The export target for merchandise export for 2021-22 is $400 billion.

Post and Pre shipment Credit 

• Loan Or credit  provided to the exporter can be divided into Pre-shipment and Post- Shipment.

Pre shipment credit 

• As the name suggests it is given to the exporter for meeting its export requirement before shipping the exported goods . 

• Suppose ABC company gets a Rs 1000 order to export chairs to a United States company . The ABC company will need money to buy the raw materials to make the chair which is to be exported . It will approach a bank with the export order and ask for a loan for this purpose . The bank, after being satisfied, can provide it a loan so that it is able to fulfil its export order . 

• This loan is called Pre -shipment credit .

Post -Shipment Credit 

•  The ABC company ships the chairs and after that it will receive the money from the American importer. It will take time. But the ABC company needs money for its business now. Here the ABC company will approach the bank and show it a receipt from the customs that it has shipped $100 worth of chairs to an American and ask for a loan from the bank. 

• The bank, after being satisfied, can give a loan to ABC Company so that it can continue its business and the company will return the loan after it receives the money from the American.

• This is called Post-Shipment credit .