Adding a new dimension to the policy support being given to project exporters by way of buyer’s credit, the Cabinet on Wednesday approved a scheme that will enable the Export Import Bank of India and other state-run banks to make available concessional finance to Indian firms that bid for strategically important large construction and infrastructure projects abroad.
Though the exact quantum of interest relief would be decided by an empowered committee, which will also select the eligible projects on a case-by-base basis, the Modi government’s move is expected to augment the Exim Bank’s capacity. Its resources, it is felt, need to be stepped up to compete with stronger Chinese counterparts.
“The repayment of the loan would be guaranteed by the foreign government (which puts out the bids for the projects). The strategic importance of a project, to deserve financing under this scheme, will be decided, on a case by case basis, by a committee chaired by Economic Affairs Secretary,” an official statement said.
On the lines of the schemes run by China EximBank, China Export & Credit Insurance Corporation or Sinosure, China Development Bank, and China Agricultural Development Bank, the committee could stipulate that for the foreign buyers to avail of the scheme, at least 75% of the project requirements should be sourced from India, if such sourcing is compatible with the requests for bids. The committee, comprising senior officials from the finance and industry ministries and the deputy national security adviser, could also consider financing strategic projects through public sector banks other than Exim Bank on the same terms.
FE had reported on June 20 on the government’s plan to boost project exports, including the interest subsidy on Exim Bank’s loans to foreign buyers.
The new scheme, which will be reviewed after two years, comes at a time when exports are in negative territory since December last year, undermining the recovery of the country’s manufacturing sector.
According to official sources, the current buyer’s credit under the National Export Insurance Account (BC-NEIA) will be reinforced with the infusion of more funds into the account. The state-owned Export Credit Guarantee Corporation can bolster the guarantee for the loans extended by Exim Bank for such projects.
While the Exim Bank had sanctioned just around $1 billion for nine projects under BC-NEIA between April 2011 and May 2014, the Modi government added pace to the process by enabling the sanction of a similar amount in the last one year.
Noting that several Indian companies have the expertise in implementing large projects but are handicapped due to high cost of finance in India, the government said in the statement that it was necessary to help them bag projects abroad provided they are in the country’s strategic interest.
The panel will comprise the deputy national security adviser and members from the departments of financial services and expenditure as well as from the ministries external affairs, home and commerce & industry.
A European parliament ‘briefing paper’ in 2011 on “export finance activities by the Chinese government” had pointed out that over the past decades China’s policy banks had stepped up export credit financing in various forms such as preferential export buyers’ credit, export sellers’ credit, mixed credits, natural resources-backed loans or lines of credit, concessional loans and export special economic zones.
“Chinese export finance activities have played an important role for China’s ‘going global’ strategy: They have strengthened China’s relationships with several developing countries especially in Africa, ensured China of significant access to natural resources, and enhanced China’s sphere of influence,” the study said. It added that Chinese exports credits have become a competitive threat to exporters from the OECD nations.
Under BC-NEIA, Exim Bank extends 8- to 12-year or longer credit to poor/developing country governments and their agencies with sovereign guarantee at Libor plus 2.25-3% per annum for up to 85% of the project value.
Significantly, to integrate BC-NEIA with the Make In India initiative, the mechanism will be more precisely targeted by weeding out mere trading firms. Indian firms in the manufacturing and infrastructure sectors and which demonstrate an excellent track record in the specific field would receive the help, a source said.
In a bid to ensure sufficient funds in the NEIA corpus, the Modi government in September 2014 approved a proposal to increase it to Rs 4,000 crore from an upper limit of Rs 2,000 crore prescribed by the UPA government. However, at the end of March 2015, the NEIA’s corpus stood at just Rs 1,471 crore. The Modi government’s decision in September 2014 to increase the NEIA guarantee coverage multiplier from 10 times to 20 times has been helping Exim Bank in supporting project exports.
* Exim Bank, PSBs to offer concessional finance to help Indian firms grab strategic infrastructure projects abroad
* A committee headed by foreign secretary to screen applications for the benefit and select eligible projects
* At least 75% of the project requirements may have to be sourced from India
* To help firms with expertise but hamstrung by high cost of credit; scheme emulates ones run by Chinese banks