Recently, the Commerce Ministry has requested the Finance Ministry to extend the ₹3,000 crore Interest Equalisation Scheme, prioritizing MSMEs involved in exports.
About Interest Equalisation Scheme (IES)
- Introduction:
- Launched in 2015 to provide financial support to exporters through subsidized export credit.
- Offers pre- and post-shipment export credit to exporters in Indian rupees.
- Initially valid for five years, the scheme has been extended multiple times.
- Implementing Agency:
- Implemented by the Reserve Bank of India (RBI) through Public and Non-Public Sector banks that provide pre- and post-shipment credit to exporters.
- Jointly monitored by the Directorate General of Foreign Trade (DGFT) and the RBI through a consultative mechanism.
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Ministry of Micro, Small & Medium Enterprises
- Formation: Established in 2007 through the merger of the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries.
- Governance: Operates under the Micro, Small, and Medium Enterprises Development Act, 2006, which provides a legal framework for MSME development.
- Mandate: Addresses issues affecting MSMEs, defines the concept of “enterprise,” and empowers the Central Government to improve their competitiveness.
- Functions: Implements policies, programs, and schemes to promote and support MSME growth across sectors.
- Key Initiatives: Provides financial aid, technology support, and skill development programs for MSMEs to enhance their contribution to India’s GDP and exports.
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- Coverage:
- Initially covered non-MSME exporters in 410 identified tariff lines.
- Extended to all exporters from the MSME sector.
- Subsidy Rate:
- 2% interest equalization for merchant and manufacturer exporters of 410 identified tariff lines.
- 3% interest equalization for all MSME manufacturer exporters.
- Mechanism:
- Export credit is provided by banks at a subsidized interest rate.
- The government compensates banks for the reduced interest charged to beneficiaries.
- Banks charging an average rate above Repo + 4% are excluded from the scheme.
What is MSME?
- Definition: MSME stands for Micro, Small, and Medium Enterprises, which are businesses involved in producing, processing, and preserving goods and commodities.
- Classification: Classified based on investment in plant and machinery or equipment and annual turnover.
Classification of MSMEs as per Indian Government
| Type of Enterprise |
Investment in Plant and Machinery/Equipment |
Annual Turnover |
| Micro |
Up to ₹1 crore |
Up to ₹5 crore |
| Small |
Up to ₹10 crore |
Up to ₹50 crore |
| Medium |
Up to ₹50 crore |
Up to ₹250 crore |
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Need for Interest Equalisation Scheme (IES) for MSMEs
- Support Export Growth: Helps MSMEs access affordable credit, ensuring competitiveness in global markets.
- High Contribution to Exports: MSMEs contribute approximately 45% to India’s total exports, highlighting the importance of the sector.
- Inflation and Logistics Challenges: Rising inflation and logistical issues, such as the Red Sea crisis, have increased export costs.
- Longer Credit Durations: Buyers are demanding extended credit periods (120–150 days), raising the cost of financing.
- Liquidity Challenges: High inflation and slower inventory off-take create financial stress for MSMEs.
- Wafer-Thin Margins: Interest subvention of 3% enables MSMEs to remain competitive in price-sensitive markets.
- Addressing High Credit Costs: IES mitigates the impact of India’s relatively higher credit costs compared to global competitors.
18 Jan 2025
