• Trade Advice
    Interest Equalization

    Interest Equalization Scheme | Everything Indian Exporters should know

    All time Scenario for Interest Equalisation Scheme

    The Interest Equalisation Scheme (IES) was implemented on 1st April 2015 to provide pre- and post-shipment export credit to exporters in rupees. At the time, exporters were facing increasing credit costs in their export cycles due to the stagnation of global demand and extended credit periods.

    By introducing this scheme, the government expected that the exporters would be able to correct their pricing and improve the competitiveness of their products.

    Under the IES, the government identifies eligible exporters and passes on the interest equalization amount they are entitled to directly to them. This scheme, which is also referred to as interest subvention, was designed to benefit the MSME segment in particular. It was originally implemented for five years.

    Note: As part of the relief measures announced during COVID-19 Lockdown, the government has extended the Interest Equalisation Scheme for Pre & Post Shipment Rupee Export Credit. The approval of the extension stays still with the same scope & coverage. The extension shall take effect from April 1, 2020 and ends on March 31st, 2020 covering a period of one year.

    What does IES offer?

    Intended to stem the downward trend in exports, IES offered a 3% rate of interest equalisation. With effect from 2nd November 2018, this was increased to 5%, although the rate remained at 3% for large manufacturers and merchant exporters.

    The government had earmarked Rs. 2,500 crore annually for IES, with the actual cost to revenue depending on the claims made by the exporters. It covered labor-intensive products that had a promise of employment generation.

    These are some of the sectors it covered:

    • Processed agricultural and food items
    • Handicrafts and handloom products
    • Handmade carpets (including silk carpets)
    • Coir and coir products
    • Raw jute and yarn
    • Readymade garments and fabrics
    • Toys and sports items
    • Paper and stationery
    • Cosmetics and toiletries
    • Leather goods, including footwear
    • Ceramic products
    • Glass and glassware

    The following products, if manufactured by MSMEs and SMEs, were also eligible:

    • Medical and scientific instruments
    • Optical frames, lenses, and sunglasses
    • Auto machinery and parts
    • Industrial, electrical, and engineering machinery and items

    The scheme was funded by the non-plan fund of the Department of Commerce; the Department was to provide a month’s fund in advance to the RBI, with reimbursements made monthly through a revolving fund mechanism. The RBI was also in charge of providing operational instructions related to the scheme.

    Also according to the Amendment in Appendix – 2T in Appendices & Aayat Niryat Forms of FTP 2015-20. The export promotion responsibility for Sesame seed and Niger seed is being shifted from Shellac and Forest Products Export Promotion Council (SHEFEXIL) to Indian Oilseeds and Produce Export Promotion Council (IOPEPC).

    Who can avail of IES and how?

    IES is available to all MSME exporters. It is also available to manufacturer exporters for exports in the 416 four-digit tariff line since January 2019. At the time of the inclusion, merchant exporters accounted for nearly 35% of the country’s exports and generally operated at a low margin of 2-4%.

    Merchant exporters play an important role in export growth and in facilitating export by MSME manufacturers, both directly and indirectly. Their inclusion in the IES sees the fulfillment of their sustained demand and lowering of their credit costs.

    To fulfill the eligibility requirements, the goods exported must meet the criteria of minimum processing in order to qualify as ‘originating from India’. These are laid down in the Rules of Origin (Non-Preferential) of the Handbook of Procedures of the Foreign Trade Policy (FTP) 2015-20.

    According to these rules:

    • The goods must be manufactured by the exporter as per the definition of ‘manufacture’ of the FTP.
    • In the case of the use of imported inputs, the export products will be classified as originating in India only if they undergo significant processing or operation (described in detail in the Handbook of Procedures).
    • The export of telecom products is eligible for the scheme, subject to minimum value addition as notified by the Department of Telecommunications.
    • Earlier on the condition of bond/security where it was only allowed to carry on the import/export activities by the consent of both the Customs & ATA Carnet, after the revised para 2.63 of HBP, 2015-20, has been replaced with either of them/one of them/anyone of them.

    How is IES provided to exporters?

    At the time of its introduction, the benefits of IES were provided to eligible exporters in the form of account deposits. This process was followed from April 1, 2015 to November 30, 2015, during which the banks identified the eligible exporters and credited their accounts.

    From December 2015 onwards, banks began charging a reduced rate of interest from eligible exporters to pass the rate of interest equalization on to them. The banks, in turn, would claim reimbursement of the amount disbursed from the RBI. Such claims had to be accompanied by an external auditor’s certificate stating that the IES claims were disbursed in compliance with the scheme’s guidelines.

    As of today, banks pass on the benefit of IES to exporters upfront and then submit claims to the RBI. These benefits are available to eligible exporters for the period between the date of disbursement and date of repayment (or up to the date on which the export credit becomes overdue).

    Vanita D'souza
    Vanita D'souza
    Communications Manager at Drip Capital
    5 min read