Explore enhanced Norms of Interest Equalization for MSME exporters, fostering global competitiveness. A game-changer for economic growth.
Till March 2024, the Reserve Bank of India (RBI) extends the interest equalization scheme for MSME exporters, aiming to enhance outbound shipments. On March 8, 2022, RBI issued modified norms for export credit under the scheme, and this article outlines these changes. Know more about Interest Equalization Scheme for MSME Exporters in this blog.
Interest Equalization Scheme for MSME – Meaning
Imagine you’re a small business owner in India, dreaming of taking your handcrafted leather goods to the world. But high loan costs threaten to clip your wings. This is where the Interest Equalization Scheme for MSME (MSME-IES) steps in, acting as a financial wind beneath your sails.
The government offers a 3% discount on your export loan interest, making your products more competitive and your profits soar. Whether you’re a manufacturer of exquisite leather bags or a magician with footwear, this scheme levels the playing field, giving you the edge you need to conquer international markets and make your export dreams a reality. So, pack your bags, polish your products, and with the MSME-IES wind at your back, set sail for global success!
IES Identification Number:
The IES Identification Number is a unique identifier assigned to businesses or entities participating in the Interest Equalization Scheme. This number may be used for tracking and managing the implementation of the scheme.
Eligibility Criteria for IES:
Processed agriculture/food items:
- Quality and safety: Products must meet international standards for food safety and quality, including hygiene and sanitation regulations.
- Packaging: Attractive and informative packaging that is suitable for export and complies with relevant regulations.
- Shelf life: Products should have a long shelf life to withstand the transportation and storage involved in exporting.
- Unique selling proposition: Offer something unique or differentiated compared to similar products in the target market.
Handicrafts, Handmade Carpet and Handloom Products:
- Authenticity and craftsmanship: Products should be genuine handicrafts made using traditional techniques and materials.
- Design and aesthetics: Appealing designs and aesthetics that resonate with the target market’s preferences.
- Durability and quality: Products should be well-made and durable to withstand use and transportation.
- Fair trade and ethical sourcing: Ensure fair wages and working conditions for artisans and sustainable sourcing of materials.
Coir and Coir-Based Manufacturers, Yarn and Other Jute Manufacturers:
- Sustainability and eco-friendliness: Highlight the natural and eco-friendly qualities of coir and jute products.
- Versatility and functionality: Offer a variety of products with diverse uses and applications.
- Innovation and product development: Continuously develop new and improved coir and jute products to stay competitive.
- Competitive pricing: Offer competitive prices while ensuring fair margins for producers.
Readymade garments:
- Quality and durability: Use high-quality fabrics and construction techniques to ensure garments last.
- Fashion trends and styles: Follow current fashion trends and cater to the specific styles and preferences of the target market.
- Comfort and fit: Ensure garments are comfortable to wear and offer a good fit for different body types.
- Competitive pricing and value for money: Offer competitive prices while maintaining good quality and value for money.
Fabrics of All Types:
- Quality and durability: Use high-quality fibres and weaving techniques to produce strong and durable fabrics.
- Variety and specialisation: Offer a wide variety of fabrics in different colours, textures, and patterns, or specialise in a particular type of fabric.
- Innovation and functionality: Develop new and innovative fabrics with unique properties or functionalities.
- Sustainability and eco-friendliness: Promote the use of sustainable and eco-friendly fabrics and production processes.
Here’s a revised list of the criteria for export products based on the categories you provided, along with some relevant visuals:
Processed Agriculture/Food Items:
- Quality and safety: Products must meet international standards for food safety and quality, including hygiene and sanitation regulations.
- Packaging: Attractive and informative packaging that is suitable for export and complies with relevant regulations.
- Shelf life: Products should have a long shelf life to withstand the transportation and storage involved in exporting.
- Unique selling proposition: Offer something unique or differentiated compared to similar products in the target market.
Handicrafts, Handmade Carpet and Handloom Products:
- Authenticity and craftsmanship: Products should be genuine handicrafts made using traditional techniques and materials.
- Design and aesthetics: Appealing designs and aesthetics that resonate with the target market’s preferences.
- Durability and quality: Products should be well-made and durable to withstand use and transportation.
- Fair trade and ethical sourcing: Ensure fair wages and working conditions for artisans and sustainable sourcing of materials.
Coir and Coir-based Manufacturers, Yarn and Other Jute Manufacturers:
- Sustainability and eco-friendliness: Highlight the natural and eco-friendly qualities of coir and jute products.
- Versatility and functionality: Offer a variety of products with diverse uses and applications.
- Innovation and product development: Continuously develop new and improved coir and jute products to stay competitive.
- Competitive pricing: Offer competitive prices while ensuring fair margins for producers.
Readymade Garments:
- Quality and durability: Use high-quality fabrics and construction techniques to ensure garments last.
- Fashion trends and styles: Follow current fashion trends and cater to the specific styles and preferences of the target market.
- Comfort and fit: Ensure garments are comfortable to wear and offer a good fit for different body types.
- Competitive pricing and value for money: Offer competitive prices while maintaining good quality and value for money.
Fabrics of all types:
- Quality and durability: Use high-quality fibres and weaving techniques to produce strong and durable fabrics.
- Variety and specialisation: Offer a wide variety of fabrics in different colours, textures, and patterns, or specialise in a particular type of fabric.
- Innovation and functionality: Develop new and innovative fabrics with unique properties or functionalities.
- Sustainability and eco-friendliness: Promote the use of sustainable and eco-friendly fabrics and production processes.
collection of colourful and textured fabrics
Toys, Sports Goods, Paper and Stationery:
- Safety and quality: Products must meet international safety standards and be made from high-quality materials.
- Age appropriateness and appeal: Cater to the specific needs and interests of different age groups.
- Innovation and play value: Offer unique and engaging toys and games that encourage creativity and learning.
- Sustainable and eco-friendly materials: Use sustainable and eco-friendly materials whenever possible.
Cosmetics And Toiletries, Leather Goods and Footwear Enterprises:
- Natural and organic ingredients: Promote the use of natural and organic ingredients in cosmetics and toiletries.
- Quality and durability: Use high-quality materials and construction techniques for leather goods and footwear.
- Design and aesthetics: Offer stylish and fashionable products that appeal to the target market.
- Ethical sourcing and sustainability: Ensure ethical sourcing of materials and sustainable production practices.
Medical and Scientific Instruments, Optical Frames, Lenses, Sunglasses:
- Quality and accuracy: Products must meet strict quality and accuracy standards for medical and scientific use.
- Innovation and technology: Continuously develop new and innovative products that address unmet needs in the market.
- Affordability and accessibility: Make products affordable and accessible to healthcare providers and patients.
- Regulatory compliance: Ensure products comply with all relevant regulations and safety standards.
Criteria for Exports Products
The interest equalisation scheme mandates that all eligible exports fulfil the minimum processing criteria for the goods. Goods originating from India qualify for the scheme and its associated benefits.
To avail the benefits of the interest equalisation scheme, exporters must manufacture the goods according to the Foreign Trade Policy’s definition of ‘manufacture.’
If the production of export products involves the use of imported products (Duty Paid or Duty-Free), such products will be considered as originating in India (Non-Preferential).
In cases where imported inputs are used, the export products will be deemed as originating in India only if they undergo significant processing or operation, as detailed in the Handbook of Procedures. These operations include:
- Simple operations such as removal of dust, sorting, classifying, washing, painting, and cutting
- Changes in packing, breaking up of products, and assembly of consignments
- Simple cutting, slicing, repacking, or placing in bottles, flasks, boxes, fixing on boards, and all other basic packing operations
- Operations ensuring product preservation during transport and storage (e.g., drying, freezing, ventilation, spreading out, chilling, sulphur dioxide or other aqueous solutions)
- Affixing labels or distinguishing signs on products or their packaging
- Mixing of products
- Simple assembly of parts to constitute a complete product
- Disassembly of parts of products
Additionally, the export of telecom products is eligible for the interest equalisation scheme, subject to minimum value addition as notified by the Department of Telecommunications.
The Validity of Interest Equalization Benefit
Duration:
- The benefit is valid from the date of disbursement of the export credit.
- It continues until the date of repayment of the credit.
- It becomes invalid if the export credit becomes overdue.
Overdue Credit:
- If the export credit becomes overdue, the benefit ceases to apply from the date beyond which it becomes overdue.
Reimbursement to Banks:
- Banks submit claims to the RBI for reimbursement of the interest equalisation amount.
- Claims must be duly certified by an external auditor.
- The Ministry of Commerce and Industry provides funds to the RBI in advance to cover reimbursements.
- Reimbursements are made on a monthly basis through a revolving fund system.
- Extension: While the scheme is currently valid until March 31, 2024, it’s subject to further review and could be extended or modified.
- Specific Guidelines: Banks have their own internal guidelines and procedures for implementing the scheme, so it’s essential to check with your bank for specific details and requirements.
- Up-to-Date Information: Always refer to the latest RBI notifications and circulars for the most accurate and up-to-date information on the scheme’s validity and any changes.
Procedure for Claiming Reimbursement
Typically, an eligible exporter is required to furnish a certification from their external auditor to the relevant bank in order to assert the benefit. The banks, in turn, extend benefits to exporters and subsequently seek reimbursement from the Reserve Bank of India, relying on the certification provided by the exporter’s external auditor.
In accordance with the Interest Equalization Scheme, banks will identify exporters eligible for the scheme and credit the corresponding amount of interest equalisation to their accounts. Following this, the concerned banks will adjust the interest rates applied to advances for eligible exporters by the rate of interest equalisation as provided by the Government.
Extension of the Scheme:
- The ‘Interest Equalization Scheme for Pre and Post Shipment Rupee Export Credit’ has been extended until March 31, 2024, or until further review, whichever is earlier.
- This extension is effective from October 1, 2021.
Interest Subsidy Scheme Extension:
- The Interest Subsidy Scheme, a component of the Interest Equalization Scheme, has also been extended until March 31, 2024.
Revised Interest Equalization Rates
- Initially: A flat 3% subvention rate for all categories.
- November 2018: Increased to 5% for MSME manufacturers, while prominent manufacturers and merchant exporters remained at 3%.
- Present Day: Revised rates based on export category and HS lines:
- 3%: MSME manufacturer exporters (all HS lines).
- 2%:
- Manufacturer exporters and merchant exporters (410 specific HS lines).
- All other exporters (all HS lines).
For a detailed breakdown, see the table below:
Table: Eligible Category & Revised Equalization Rate
| Sl.No | Export Items | Eligible Category | Revised Rate |
| 1 | 416 HS lines (list in scheme) | Large manufacturers & Merchant exporters | 2% |
| 2 | All HS lines | MSME manufacturers | 3% |
| 3 | All other HS lines | All other exporters | 2% |
Rate Changes for Interest Equivalence:
- The revised interest equalisation rates under the scheme are as follows:
- 3% for MSME manufacturer exporters exporting under any HS lines.
- 2% for manufacturer exporters and merchant exporters exporting under 410 HS lines.
Benefits of Interest Equalization Scheme for MSME:
- Reduced Interest Costs:
The scheme provides interest subvention, effectively lowering the interest rate on export credit for eligible MSMEs. This directly translates to lower financing costs, easing the financial burden on MSMEs.
- Enhanced Competitiveness:
Lower interest costs can help MSMEs price their products more competitively in international markets, improving their ability to compete with larger enterprises and foreign counterparts.
- Increased Exports:
By making exports more financially viable, the scheme encourages MSMEs to explore export opportunities and expand their global reach. This can lead to greater market diversification and increased revenue streams.
- Boost to Manufacturing and Employment:
MSMEs play a crucial role in the manufacturing sector and job creation. By supporting their export endeavours, the scheme contributes to growth in the manufacturing sector and potential for employment generation.
- Financial Support for Growth:
The scheme provides a financial cushion for MSMEs to invest in export-oriented activities, such as product development, marketing, and market expansion. This can facilitate their growth and expansion into new markets.
- Levelling the Playing Field:
MSMEs often face challenges in accessing finance at competitive rates. The scheme helps to bridge this gap, providing them with a more equitable footing in the global marketplace.
- Encourages Export Diversification:
The scheme covers a wide range of export products, encouraging MSMEs to diversify their export portfolios and explore new opportunities in different sectors.
- Promotes Export-Oriented Manufacturing:
By providing financial support for export credit, the scheme incentivizes MSMEs to focus on manufacturing products for export, which can contribute to overall economic growInterest Equalization Magic: Elevating MSMEs in the Global Export Arenath and export earnings for the country.
DGFT Online IT Module for Interest Equalisation Scheme
In order to gather detailed information about the beneficiaries of the scheme and enhance monitoring effectiveness, the Directorate General of Foreign Trade has implemented the DGFT online IT Module for the Interest Equalization Scheme, as per the Trade notification dated 15 March, 2022.
Exporters intending to avail themselves of benefits under the Interest Equalization Scheme are required to submit their applications online through the newly introduced DGFT Online Module for the Interest Equalization Scheme.
Conclusion
The Interest Equalization Scheme for MSME exporters has undergone several revisions since its inception, aiming to provide targeted support for different categories of exporters. While the overall rate has decreased compared to the initial fixed rate of 3%, the current structure offers differentiated rates based on the exporter’s type and the product category they export.
FAQs
How does the Interest Equalization Scheme benefit Micro, Small, and Medium Enterprises (MSMEs) in India?
The Interest Equalization Scheme (IES) helps MSMEs by reducing their financing costs for exports. The government provides a subsidy on the interest rate paid on pre- and post-shipment rupee export credit, making exports more competitive and boosting profitability. This can incentivize MSMEs to enter new markets or expand their existing exports.
Which sectors or industries are eligible to avail themselves of the Interest Equalization Scheme?
The scheme is currently available to all MSME manufacturer exporters, regardless of the sector or industry they operate in. Additionally, merchant exporters dealing in certain identified tariff lines, mainly from labor-intensive sectors like agriculture, food processing, handicrafts, and leather goods, are also eligible.
What types of financial products and transactions are covered under this scheme?
The IES covers both working capital loans and term loans for pre- and post-shipment export financing. These loans can be used for various purposes related to exports, such as procuring raw materials, production, processing, packaging, marketing, and shipping.
Is there a specific criteria for MSMEs to qualify for the Interest Equalization Scheme?
Yes, to be eligible, MSMEs must: Be registered with the MSME Development Office. Have an Export-Import Code (IEC) issued by the Director General of Foreign Trade (DGFT). Fulfill any additional requirements specific to the chosen tariff line or scheme variant.
How is the interest equalization amount calculated, and what is the rate of interest covered under the scheme?
The interest equalization amount is the difference between the actual lending rate for export credit and the benchmark rate set by the government. The current rates are 3% for all MSME manufacturer exporters and 2% for specific eligible manufacturer and merchant exporters under 410 HS lines.
What documentation and procedures are involved in applying for the Interest Equalization Scheme for MSMEs?
MSMEs need to approach their export financing bank for availing the scheme. The bank will require details of the export transaction, loan documents, and relevant government certifications. The specific procedures may vary slightly between banks, but the RBI and DGFT websites provide detailed guidelines
Are there any conditions or restrictions on the end-use of funds obtained through the Interest Equalization Scheme?
The funds must be used solely for the intended export-related purposes mentioned in the loan application. Misuse of funds can lead to penalties and disqualification from the scheme.
How long does the Interest Equalization Scheme typically remain in effect, and are there any renewal or extension procedures?
The scheme is currently valid until March 31, 2024. The government reviews and extends the scheme periodically based on economic considerations and export promotion goals.
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