An efficient system for providing export finance to Indian exporters will add to their international competitiveness. Such finance is required for short periods of time both before and after the shipment of an export order. Banks provide export finance at a rate lower than their prime-lending rate.

The Reserve Bank of India (RBI) regulates the provision of export credit by the commercial banks in India, both Indian and foreign, by stipulating that a minimum proportion of their total lending be provided as export finance. From time to time, the RBI has announced various rules and guidelines to ensure smooth and efficient operation of this system. In recent years the RBI has organised seminars at the major exporting centres for the benefit of exporters and branch level bank officials to resolve problems relating to export credit. The RBI also holds quarterly meetings of the All India Export Advisory Committee (AIEAC) to deliberate on issues raised by export organisations and take appropriate action. Further, exporters can call on concerned RBI officials at a designated time-slot on any working day to redress their grievances.

In order to get feedback on this simplified procedure set up by RBI for export credit delivery and to assess exporters’ satisfaction with bank services, RBI proposed in its policy statement for 2001-02, to conduct a survey with the help of an independent outside agency. The Mid-Term Review of Monetary and Credit Policy for 2001-2002 announced that the survey would be undertaken by NCAER.

NCAER is extremely grateful to the RBI for having provided it with an opportunity to address the much discussed issue of export finance. We would like to put on record our sincere thanks to Mr. Vepa Kamesam, Deputy Governor, Reserve Bank of India for having put his confidence into our organisation. Special thanks are due to the RBI officials who have helped the NCAER team to accomplish this work successfully.

We hope that this exercise will add to the understanding of this complex issue. While the survey reveals a generally high level of satisfaction by exporters, there is considerable variation by sector, size and region, which will provide ample opportunity for follow-up action by the banks and the RBI. In addition, the present study can serve as a benchmark, so that follow-up studies can track progress, on both a national and regional level.

April 2002

Suman Bery
Director-General

The present study is an attempt to analyse the exporters’ level of satisfaction with respect to the prevailing export-credit delivery system in India. Getting the requisite information from 327 bank branches and 1762 exporters from all over the country is an uphill task. The study would not have been completed without help received by NCAER from various officials of the Reserve Bank of India both at their Central office at Mumbai and at various regional offices spread all over India. We would like to sincerely acknowledge the help and suggestions received from them during different phases of the study. The group of RBI officials associated with the study from the Central office is:

• Shri S.S. Gangopadhyay, Ex.CGM, IECD, now RD, Hyderabad.
• Shri K. Vijayraghvan, CGM, IECD.
• Shri S.D. Sapkal, DGM, IECD.
• Shri K. K. Mahajan, DGM, ECD.
• Ms. Abha Prasad, Director, DEAP.
• Shri A. K. Srimany, Director, DESACS
• Shri E. Varghese, Asst. Manager,IECD

Apart from RBI officials at central office, we would also like to acknowledge the help received from the following officials from RBI regional offices:

New Delhi: Shri Y. S. P. Thorat (RD, New Delhi, now RD, Maharashtra), Shri G. Srinivasan (GM, DBS), Shri D. K. Bakshi (DGM, DBS, now at Kanpur regional office), Shri O. P. Khannegwal (AGM, DBS).

Jaipur: Shri Ramesh Chander (RD, Rajasthan, now RD, Delhi), Shri C. L. Dua (DGM, ECD), Shri L. M. Bhat (Manager, ECD).

Kolkata: Shri Baidya Nath Datta (DGM).

Bhubaneshwar: Shri. R. K. Singh (DGM).

Kanpur: Shri V. K. Maurya (GM, ECD).

Chennai: Shri R. R. Verma (DGM, DBOD).

Chandigarh: Shri C. L. Tura (AGM).

Bhopal: Shri B. S. Chawla (AGM, ECD).

Kochi: Shri P. C. Pillai (AGM, ECD).

Bangalore: Shri S. S. Pujari (DGM, DBOD).

Hyderabad: Shri S. C. Kakar (RD).

We would also put on record our sincere thanks to all the bank branches and exporters who have spent their valuable time to provide us with a rich primary data information.

The fieldwork would not have been completed without the help extended by various export promotion councils and other officials. We sincerely acknowledge the help provided by the following export promotion councils/officials during the course of fieldwork:

• Apparel Export Promotion Council
• Automotive Component Manufacturers Association of India.
• Electronics and Computer Software Export Promotion Council.
• Export Promotion Council of Handicrafts.
• The Gems and Jewellery Export Promotion Council.
• Centre for Development of Stones.
• Federation of Rajasthan Handicraft Exporters.
• Cotton Textiles Export Promotion Council.
• Engineering Export Promotion Council.
• Development Commissioner, FALTA Export Processing Zone.
• Directorate General of Commercial Intelligence and Statistics.

Last, but not the least, we sincerely acknowledge the help received from Shri Vishnu G. Tandon. His vast experience in areas of banking as well as exports stood us in good stead during the process of designing questionnaires for bankers and exporters.

Export finance plays a crucial role in enabling exporters in accepting and efficiently executing their export orders. Export credit is required for short periods of time both before and after the despatch/shipment of an order. While the pre-shipment export finance is required as working capital for accomplishing timely production, packing and shipment of the orders, the post-shipment finance facilitates in sustaining exporters’ business operations while still waiting to receive payments due from foreign buyers. Commercial banking institutions have been important sources of export credit in India.

The Reserve Bank of India regulates provision of export credit by the commercial banks in India, both Indian and foreign, through stipulating some minimum proportion of their total lending to be provided as export finance. From time to time, the RBI announces various rule and guidelines to ensure smooth and efficient operation of this system.

In order to have a feedback on simplification of procedures by the RBI for export credit delivery as also the level of exporters’ satisfaction with bank services, the policy statement for the year 2001-02 proposed to conduct a survey with the help of an independent outside agency. It was announced in the Mid-Term Review of Monetary and Credit Policy for the year 2001-2002 that such a Survey would be undertaken by NCAER, New Delhi.

The present primary survey based study is an attempt to analyse the existing export-credit delivery system in India. The focus has been on short-term working capital credit requirements of the Indian exporters, which are mainly taken care of by the scheduled commercial banks. These banks provide exporters with financial and other services. While the financial services include provision of export finance, other services include handling of export documents, counselling and advisory services, facilitating foreign exchange operations of exporters, etc. The foreign exchange operations of the banks are guided by the RBI and FEDAI regulations.

Bankers’ views on and exporters’ satisfaction with the existing export credit delivery system have been analysed through a primary survey of bank branches and exporters across the country. A sample of 383 bank branches was selected at random out from their two categories (A and B) and four groups (SBI and associate banks, nationalised, private and foreign). A sample of 2090 exporters was selected at random from among 34 product categories spread over 29 cities in four different zones of India (North, East, West, and South). The sample represented small, lower-medium, medium and large exporters roughly in the ratio of 2:2:1:1 A total of 327 valid responses from banks along with 1762 from exporters have finally been analysed.

Separate questionnaires were designed to survey banks and exporters. While bankers’ questionnaire was structured to obtain bankers’ view on and adherence to the RBI norms and guidelines, that for exporters was intended to get information on their satisfaction with the existing credit delivery system along with suggestions for improvement.

• Banks have been found to be granting export credit for the working capital needs of a vast majority of exporters.
• Except for some apparent hesitation on the part of foreign banks, various bank groups cater to the needs of new exporters.
• Apart from certain important criteria regarding financial standing of the export unit asking for finance, nearly 84 per cent of all the bank branches have been found skirting the RBI suggestion with regard to "no insistence" on collateral security. Relatively more frequent occurrence of this situation across regions is in bank branches in north while across bank groups nationalised and private bank branches have been observed behaving like this.
• Bank branches in east and foreign banks across the country are relatively conservative in catering to the needs of small exporters, i.e. with export turnover of less than Rs. 50 lakh.
• Nearly half the bank branches have reported no fixed target of achieving export credit disbursal during the year 2000-01.
• A Bankers’ Adherence Index (BAI) to the RBI guidelines has been prepared using and integrating bits and pieces of information "self-revealed" by the bank branches. At the all-India level, about 8 per cent of bank branches fall under the poor category with regard to their adherence to the RBI’s guidelines for export credit delivery system. About 14 per cent of the bank branches get excellent grade. About 21 per cent of all the bank branches turn out as average and 57 per cent as good.
• Analysing the excellent grade for different groups of banks, foreign banks stand apart with a distinction. About 29 per cent of all the foreign bank branches under survey qualify as excellent. In the case of SBI and associate branches as low as 6 per cent turn out as excellent. The nationalised and private bank branches are "revealed" mediocre performers with less than 15 per cent turning out as excellent.
• Nationalised banks are leaders in providing export finance, followed by SBI and associates, private banks and foreign banks. Nearly one-sixth of exporters find pre-shipment sanction grant application form "difficult" and "very difficult". Relatively large proportion of small and lower-medium exporters finds this form difficult. With regard to the bank group association, exporters associated with nationalised banks are relatively least satisfied and those associated with foreign-banks are most satisfied.

• Nearly one-third of all exporters feel that linking export credit provision to collateral security is a major problem. A larger proportion of exporters in north and east finds this to be a problem as compared with exporters of west and south.
• ECGC cover is the most preferred alternative to collateral security followed by confirmed orders / LCs, financial position of the company; past track record, personal guarantees by directors / partners.
• Nearly two-third of the exporters feels that facility to interchange between pre- and post-shipment credit limits will help exporters.
• One of the most important findings of this study has been that more than three-fourths of exporters are satisfied with overall bank services relating to export credit delivery. Nearly one-fourth of exporters has perceived it as "excellent" and more than half as "good". The only exception is eastern region where only one-eight perceive it as "excellent" and less than half as "good".
• On one hand relatively low proportion of small exporters has perceived bankers’ performance as "excellent", whereas relatively high proportion of large exporters perceives it as "good". While a relatively high proportion of exporters of readymade garments has perceived bankers’ performance as "excellent", relatively high proportion of exporters of textiles perceives it as "good".

• The RBI needs to pay greater attention to problems faced by the exporters by giving greater emphasis to specific regions, size-groups, product-categories, and bank-group association of exporters through resolving the typical problems that these classes of exporters face. The present study has pointed to the segments where the satisfaction with the credit system is relatively lower. Monitoring the services rendered by the financial system on a regular basis would provide a basis for steps to make the system more responsive to export needs.

Export finance plays a crucial role in enabling exporters in accepting and efficiently executing their export orders. Export credit is required for short periods of time both before and after the despatch/shipment of an order. While the pre-shipment export finance is required as working capital for accomplishing timely production, packing and shipment of the orders, the post-shipment finance facilitates in sustaining exporters’ business operations while still waiting to receive payments due from foreign buyers. Commercial banking institutions have been important sources of export credit in India.

The provision of export finance differs from the provision of finance to production oriented to domestic markets due to risks associated with export credit. Such risks include probable credit as well export hazards in various forms. The standard credit risks include situations in which the buyer does not pay, buyer’s financial insolvency where the buyer can not pay, refusal of receipt of exported goods, and/or unfair termination of the contract. Export related risks include foreign exchange risk, and country risks including the potential threat of losses due to political and economic events beyond the control of the exporter. These risks have to be considered by both the exporters as well as the credit agencies.

Export credit plays an important role in risk management and obtaining contracts for exporters. It has the potential to augment the international competitiveness of a country by leading to geographical diversification of exports and developing new markets.

It is important for a country to develop and maintain an efficient system of providing export credit lest it should become a bottleneck in winning an export contract. In a way, it adds to international competitive strength of exporters of a country.

India does not provide direct subsidies to exporters. Instead, India relies on a wide range of indirect measures, including duty and tax concessions, export finance, export insurance and guarantee, and export promotion and marketing assistance. We shall focus mainly on export finance in this study with some references to export insurance and guarantees.

Commercial banks provide export finance at a rate lower than their prime lending- rate. With progressive deregulation of interest rates, banks now have considerable flexibility to decide their deposit and lending rate structures and manage their assets and liabilities with greater efficiency. On the lending side, banks are free to prescribe their own lending rates including the Prime Lending Rate (PLR). On the deposit side, banks have been given the freedom to offer a fixed rate or a floating rate subject to the approval of their Boards.

Keeping in view the international practice, the scheduled commercial banks have been provided with more operational flexibility through the introduction of the Tenor Linked Prime Lending rates (TPLRs) since April 1999. The PLR was converted into a benchmark rate with the requirement of this being a floor rate for loans above Rs.2 lakh being relaxed. With effect from April 19, 2001, commercial banks have been allowed to lend at sub-PLR rate for loans above Rs.2 lakh.

The rupee export credit interest rate structure was changed with effect from May 5, 2001 by providing ceiling rates linked to the relevant PLRs of the banks. This was expected to introduce healthy competition and provide exporters a greater choice to avail of banking services in terms of interest rate, quality of service and transaction costs. The RBI effected a reduction in ceiling rate on export credit by another 1 percentage point (i.e. up to 2.5 per cent less than short-term PLR) across the board on September 26, 2001, which would remain valid up to September 30, 2002.

The priority sector lending is an important function of India’s commercial banks. It includes lending to agriculture, small-scale industries (SSI), transport operators, etc. Export credit is over and above the priority sector. The foreign banks operating in India have to allocate a target of 32 per cent of their net bank credit (NBC) to priority sector and export finance with

sub-sectoral targets of 10 per cent for SSI and 12 per cent for exports. The proportion of gross bank credit allocated to exports has witnessed significant changes during the last two decades. It increased from less than 6 per cent in the mid-1980s to over 12 per cent by the mid 1990s with a downward trend toward 10.5 per cent during the late 1990s (Fig 1.1). The share of export credit to total exports has been about 25.2 per cent during 1980-81 to 1999-2000. While it was about 24 per cent in the 1980s, it increased to about 26.4 per cent in the 1990s. There has been a general decline in this ratio from over 29 per cent during the late 1980s to less than 24 per cent during the late 1990s (Fig. 1.2).

Whereas export finance is provided by the commercial banks, the insurance cover to Indian exporters is provided by the wholly government-owned Export Credit Guarantee Corporation of India (ECGC). This insurance cover is against the risk of non-realisation of export proceeds due to political or commercial reasons and to provide guarantees to financial institutions to facilitate the granting of credit facilities to exporters on liberal basis. It provides a range of credit risk insurance covers to exporters against loss in export of goods and services. It offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them. ECGC provides guidance to exporters in export related activities as well as information on credit worthiness of overseas buyers in about 180 countries about which it maintains its own credit ratings. It also assists exporters in recovering bad debts. The ECGC is a service organisation, with profit not being the sole motive. Its operation has shown surplus of income over expenditure and in each of the six years, viz.1995-96 to 2000-2001.

Prior to the MCP statement, 2001-02, export credit was provided by prescribing specific rates of interest on pre-shipment credit and, mostly as a ceiling in the case of post-shipment credit. The MCP statement, 2001-02, proposed to make interest rate on export credit by banks to be indicated as a ceiling rate in all categories including pre-shipment credit. Such ceiling rates would be linked to the Prime Lending Rates (PLRs) of respective banks available to their other domestic borrowers. The ceiling rate was fixed at 1.5 per cent below the PLR in the case of pre-shipment credit up to 180 days and post-shipment credit up to 90 days. The ceiling rate was later revised to 2.5 per cent below PLR in the Mid-Term Review of Monetary and Credit Policy for

the year 2001-02 announced in October 2001. The ceiling rate for pre-shipment credit for a period beyond 180 days but up to 270 days as well as post-shipment credit beyond 90 days but up to 180 days (from the date of shipment) would be PLR plus 0.5 per cent (see Table 1.1).

Note: Since the rate announced from May 5, 2001 are ceiling rates, banks would be free to charge any rate below the ceiling rates.

* Announced for period up to March 31, 2002 but extended up to September 30, 2002 by another RBIs order dated March 11, 2002.

Source: RBIs circulars dated September 24, 2001 and March 11, 2002.

On September 24, 2001 RBI declared a special financial package in consultation with the Government of India, for large value exports of select products, which are internationally competitive and have high value addition. The details of the financial package are furnished below.

1. The products eligible for export under special financial package are:

1. pharmaceuticals (including drugs, fine chemicals),
2. agro-chemicals (including inorganic and organic chemicals),
3. transport equipment (including commercial vehicles, two and three wheelers, tractors, railway wagons, locomotives),
4. cement (including glass, glassware, ceramics and refractories),
5. iron and steel (including iron & steel bars/rods and primary and semi-finished iron & steel),
6. electrical machinery (including transmission line towers, switch gear, transformers).

2. Manufacturer exporters of above products with export contracts of Rs.100 crore and above in value terms in one year will be eligible for the special financial package.
3. Validity period of the financial package will be from October 1, 2001 to September 30, 2002.
4. Exporters covered under the special financial package will be extended credit at concessional rate of interest for an extended period up to 365 days at pre-shipment as well as post-shipment stages as against the maximum periods of 270 days and 180 days respectively applicable for normal export credits. Further, the rate of interest of export credit for period beyond 270 days and up to 365 days at pre-shipment stage will be the same as for normal pre-shipment credit for period beyond 180 days and up to 270 days. Similarly, post-shipment credit will be extended for periods beyond 180 days and up to 365 days at the same rate of interest as applicable for normal post-shipment credit for the period beyond 90 days and up to 180 days.

Given that in the forward market premium for US dollars, the effective rate of credit to an exporter getting export credit at nominal rate of 8.5 to 9 per cent would actually be lower. Given that the forward premium for US dollar was about 4.5 per cent in April 2001, the nominal rate interest at 8.5 to 9 per cent would actually get translated into around 4 to 4.5 per cent through selling the export earnings in the forward market. Such a rate is expected to be internationally competitive. Exporters were given the option to avail of pre- and post-shipment credit in foreign currency at a ceiling rate of LIBOR plus 1 percentage point instead of earlier 1.5 percentage points.

It was announced in the Monetary and Credit Policy (MCP) statement for the year 2001-02 that the RBI had been arranging seminars at major exporting centres for the benefit of exporters and branch level bank officials for resolving the problems relating to export credit and meeting foreign currency requirements. Further, the RBI has also been holding meetings of All India Export Advisory Committee (AIEAC) at quarterly intervals for deliberating on the issues raised by exporter organisations and taking appropriate action. Further, exporters have also been advised that they can call on concerned senior officials of RBI an any working day during a designated time-slot without prior appointment for redressal of their grievances.

In order to have a feedback on simplification of procedures by the RBI for export credit delivery as also the level of exporters’ satisfaction with bank services, the policy statement for the year 2001-02 proposed to conduct a survey with the help of an independent outside agency. It was announced in the Mid-Term Review of Monetary and Credit Policy for the year 2001-2002 that such a Survey would be undertaken by NCAER, New Delhi.

It was during the years 1998-99 and 1999-2000 that the RBI had introduced several measures to ensure timely delivery of credit to exporters and remove procedural hassles. These measures included:

• Provision of ‘On Line credit’ to exporters;
• Extension of ‘Line of Credit’ for longer duration for exporters with good track record;
• Peak/non-peak credit facilities to exporters;
• Permission for interchangeability of pre-shipment and post-shipment credit; and
• Meeting the term loan requirements of exporters for expansion of capacity and modernisation of machinery and upgradation of technology.

It was indicated in the Mid Term Review of Monetary and Credit Policy for the year 2000-01 that the suggestions received from exporters and export trade organisations were examined by the RBI and the Bankers’ Group and guidelines were issued to banks to further simplify procedures for export credit. These included:

• Adopting a flexible approach in negotiating bills drawn against LCs over and above sanctioned limits;
• Delegating discretionary/higher sanctioning power to branches;
• Authorisation to branches for disbursing a certain percentage of enhanced/ad-hoc limits pending sanction; and
• To incorporate all sanctions including waiver of submission of order/LC for every disbursal and export credit and submission of a statement of orders/LCs in hand at periodical intervals in the sanction letter and advise ECGC immediately about the terms of sanction to facilitate faster claim settlement.

Improvements were also made in the procedures for handling of export documents and fast-track clearance of export credit at specialised branches of banks. Similarly, new simplified guidelines were issued for software services, project services and software products and packages.

The present study has five major objectives. To investigate and analyse:

1. Status of the existing export-credit delivery system in India;
2. WTO compliance of India’s export credit system;
3. Assessment of satisfaction of Indian exporters with credit delivery system;
4. Banks’ adherence to RBI guidelines on export credit; and
5. Suggest measures to further improve the export credit delivery system.

Bankers’ views on and exporters’ satisfaction with the existing export credit delivery system have been analysed through a primary survey of bank branches and exporters across the country. A sample of 383 bank branches was selected at random from their two categories (A and B) and four groups (SBI and associate banks, nationalised, private and foreign). A sample of 2090 exporters was selected at random from among 34 product categories spread over 29 cities in four different zones of India (North, East, West, and South). The sample represented small, lower-medium, medium and large exporters roughly in the ratio of 2:2:1:1. A total of 327 valid responses from banks along with 1762 from exporters have finally been analysed.

Separate questionnaires were designed to survey banks and exporters. While bankers’ questionnaire was structured to obtain bankers’ view on and adherence to the RBI norms and guidelines, that for exporters was intended to get information on their satisfaction with the existing credit delivery system along with suggestions for improvement.

The status of India’s export credit delivery system in the backdrop of the national as well as the international scenario have been discussed briefly in the preceding parts of this chapter. A discussion on WTO compliance of India’s export-credit delivery system is provided in Chapter 2. The survey methodology and the sampling design for selection of banks and exporters are the subject matter of Chapter 3. Detailed analysis of the findings of the study has been reported in Chapter 4. Results of the study along with prospective suggestions are outlined in the concluding Chapter 5.

The decade of 1990s was of immense significance for India’s economy in the context of the unilateral as well as the global changes in trade policy. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO framework. The new policy regime accords a vital role to export of goods and services in the growth process based on the perception that an open trade regime is a pre-requisite for attaining higher economic growth. The incentives, based primarily on exchange rate, have become relatively uniform for production across export and import substituting goods. Benefits of opening up of trade regime on growth and welfare are achieved through two alternative perspectives: first from traditional trade-theoretic viewpoint of the efficiency enhancing role of free trade in a static context, and the second from the perspective of growth accounting and intertemporal efficiency and welfare.

There are various arguments in literature to justify the use of export subsidies. These include the a) use of export subsidies by one’s competitors; b) neutralisation of import duties; c) infant industry argument based on capital market imperfections and externalities; and d) second best considerations related to moral hazard and adverse selection. The arguments for export subsidies thus fall into two categories: those based on welfare maximisation as the objective (academic economists) and those that take export expansion or export diversification as the target (policy analysts). In the former case, the arguments often suffer from the same flaws as the arguments for protection, advanced during 1950s through 1970s to promote import substitution. In the latter case, based on Latin American experience, it is far from clear export subsidies constitute the least-cost instrument of achieving export expansion or diversification. In the case of India, there is no convincing case till date to support the argument that "export credit subsidies lead to export growth".

With import-substitution policies having failed and now discredited, there has been a shift in favour of interventions on behalf of export interests. Two types of export subsidies have increasingly been used during the recent years: export-credit and insurance subsidies. Export-credit subsidies are often defended on the ground that the market fails to support potentially profitable but risky exports. However, this need not be the case if lenders are risk neutral. Even if lenders are risk averse, it is not clear that subsidies to profitable but risky exports are welfare enhancing. Export-credit-insurance subsidies are advocated on the ground that adverse selection and moral hazard problems cause insurance markets to fail. However, it is not clear that the government has a particular advantage over the market in dealing with adverse selection and moral hazard.

Under typical supply, demand, and cost conditions, subsidising export credit produces a combination of some loss in efficiency together with redistribution of income away from citizens providing the subsidy and towards exporters and foreign importers. "Subsidised export financing has been described as protectionism in reverse. It is certainly economic nationalism, and its effect on world trade could become as distorting and, in time, as paralysing as that of straight protection…. Perhaps something like a GATT round of negotiations may eventually be needed to bring the financing of international trade back to reason."

Export credits have traditionally been supported through a) direct loan and subsidy programmes; and b) insurance and guarantee programmes. This study concentrates on the first set of programmes.

Various attempts have been made since 1930s to control subsidised export credit terms. The Berne Union (The International Union of Credit and Investment Insurers) was established in 1934 to provide a forum for the discussion and exchange of information among member export credit insurance agencies. Its four founding members were France, Italy, Spain and the United Kingdom. Over the years, the Berne Union has made non-binding recommendations on the regulation of export credit policies. However, beginning in the late 1960s, members increasingly disregarded these guidelines.

The Berne Union now has about 50 large export credit agencies from 40 countries as its members. Institutions and not their governments are members. The Union works for the acceptance of sound principles of export credit and investment insurance and the exchange of information and experience. It has also adopted a series of agreements and understandings by which members undertake to abide by certain maximum `credit terms’ and `terms for goods’. India was the 15^th country to join the Berne Union in 1957 with Export Credit Guarantee Corporation (ECGC) becoming its 17^th member organisation.

It was in 1963 that the Organisation for Economic Cooperation and Development (OECD) Trade Committee established a Group on Export Credits and Credit Guarantees. It was in 1974 that the export Credit Group of OECD concluded an informal agreement which has come to be known as the "Gentlemen’s Agreement" Jurisdictional confusion slowed the negotiations in 1975. Both the European Commission and individual governments claimed the right to negotiate on commercial policy for European Committee (EC) members. The European court of Justice awarded this authority to the EC. The export credit agreement concluded in 1976 was enacted as a series of unilateral declarations by the nations involved in its negotiation rather than as a formal agreement and came to be known as the "Consensus". Thirteen more OECD countries accepted it in 1977. The dispute with the EC was finally resolved in 1977, and on April 1, 1978 the "Arrangement on Guidelines for Officially Supported export Credit" was concluded, superseding the "Consensus". The EC members participated as a single unit. The Arrangement reiterated the conditions specified in the Consensus, and continued as a voluntary set of guidelines. Despite a great deal of pressure, principally from the United States, little progress could be made in reforming the Agreement till 1980.

The policy environment is a critical factor in export growth. Subsidised service provision is not itself a particularly effective means of compensating for that environment. Market failure in developing countries has commonly been cited as the compelling reason for introducing preferential credit and insurance. However, these arguments have not been well articulated and there has not been any systematic analysis of the costs of alternative government responses. Industrial countries’ programmes have histories of subsidy while developing country preferential programs have not been significant factors in stimulating exports.

Export credit agencies play a key role in international trade and investment flows. The first export credit agencies were established in the 1920s but most have them have been set up only during the last three decades. Their traditional role is to support and encourage exports and outward investments by insuring international trade and investment transactions, and in some cases by providing trade finance directly. The export credit agencies have different shapes and sizes and insure both political and commercial risks on exports. Until the late 1980s, most of these operated as government entities or on the account of their governments. There was little competition for business, as there tended to be one export agency in each country. Much of this changed during 1990s and is still changing. According to the WTO rules all export credit agencies are required to break even. Private sector insurers and re-insurers are increasingly willing to undertake this business. However, it is yet not clear how the private insurers would be able to break even in case they want to act as insurers of last resort while wholly depending on this business. Probably only official credit agencies can play the role of being the insurer of last resort.

Though there is conflict between the twin objectives of breaking even and being the insurer of last resort, it has been suggested that the conflict is not a real one because:

• The period over which the business of official credit agencies is expected to break even is a very long one, longer than would be expected in the private market;
• Official export credit agencies do not pay taxes; and
• The shareholders of official export credit agencies (i.e. governments) do not expect to receive any dividends.

However, the notion that the official export-credit agencies can act as insurer of last resort while simultaneously adhering to the WTO mandate suggests one of two alternatives. First, either it underestimates ability of the private sector to put a market price on the assessed risks or it overestimates the quality of the risks being underwritten. Second, an insurer of last resort cannot acquire the ability, skill and experience, required to operate right at the margin of high-risk business. These issue would require much more discussion over the coming years.

Governments all over the world provide subsidies as a tool for realising their policies. Subsidies may take various forms such as grants, tax exemptions, low-interest financing, investments, and export credits. Six primary purpose-based categories subsidies include 1) export subsidies; 2) subsidies contingent upon the domestic over imported goods; 3) industrial promotion subsidies; 4) structural adjustment subsidies; regional development subsidies; and 6) research and development subsidies. Two primary beneficiary-based subsidies include a) "non-specific" subsidies, i.e. subsidies that are not limited to specific businesses or industries; and b) "specific" subsidies.

Even though each government may consider its goals for providing subsidies to be legitimate, certain types of subsidies may provide excessive protection to domestic industries and act as barriers to trade. WTO agreements, therefore, attempt to put to discipline unfair use of subsidies by the member governments. The basic principles of the legal framework for subsidies are provided in Articles VI and XVI of the GATT 1994. There is a separate Agreement on Subsidies and Countervailing Measures (SCM), under the WTO Agreement, addressing the implementation issues relating to subsidies in general. Compared with the erstwhile GATT code of subsidies, SCM provides explicit clarity and strength to the issues relating to implementation and countervailing actions.

The SCM Agreement provides a definition of subsidies in Article 1. Except as provided in the Agreement on Agriculture, subsidies are classified under classified into "prohibited" (Article 3), "actionable" (Article 5, 6 and 7) and "non-actionable" (Articles 8 and 9) subsidies. Prohibited subsidies are of two types a) based upon export performance, including those illustrated in Annex I of the SCM Agreement and b) based upon the use of domestic over imported goods.

Actionable subsidies, in case these cause adverse effects, can be challenged either through multilateral dispute settlement mechanism or through unilateral countervailing action. Adverse effects to the interests of other members include a) injury to domestic industry of another member; b) nullification or impairment of benefits accruing directly or indirectly to other members under GATT 1994; and c) serious prejudice to the interests of another member.

Non-actionable subsidies are not "specific" to an enterprise or industry or group of enterprises or industries. These include assistance for a) certain types of basic research; b) development of disadvantaged regions; and c) adaptation of the existing facilities to new environmental requirements imposed by law and/or regulations resulting in greater financial burden on adapting firms.

The Special and Differential Treatment under the WTO is the result of its attention to the special needs and problems of developing country members. Article 27 under part VIII of the SCM Agreement deals with provisions for the developing country Members recognising that subsidies may play an important role in their economic development. It states that the prohibition of subsidies under Article 3 shall not apply to the least-developed countries as defined by the United Nations, as well as, to 20 developing WTO Member countries (including India) whose GNP per capita was less than US$ 1,000 per annum (Table 2.1). However, if a developing country member reaches export competitiveness in one or more products, export subsidies in such products shall be gradually phased out over a period of eight years. Export competitiveness in a product exists if a developing country Member’s exports of that product have reached a share of 3.25 per cent in world exports of that product for two consecutive calendar years. Export competitiveness shall said to exist either a) on the notification by the developing country Member having reached export competitiveness, or b) on the basis of a computation undertaken by the Secretariat if at the request of any Member. In this paragraph, a product is defined as a "section heading" of the Harmonised System Nomenclature.

There has been some discussion in India about issues relating to WTO compliance of India’s export incentives. The need for a review of the SCM Agreement has been pointed out due to the existence of large scale subsidisation by the developed countries (Satpathy, 1999). Hajra (1999) points to various major concerns expressed by Trade Policy Review of India by WTO (1998) regarding the inconsistencies in India’s trade policy regime. Ahuja (2001) provides a detailed discussion on WTO compliance of export incentives in India.

We would like to note that paragraph 128 of WTO (1998) is a brief discussion about India’s export subsidies. It states that "India does not provide direct subsidies to exporters. Instead, as described below, India relies on a wide range of indirect subsidies, including duty and tax concessions, export finance, export insurance and guarantee, and export promotion and market assistance."

For the purposes of the current study we shall limit ourselves only to the two "prohibited" export subsidies, viz. a) lower than market rate of interest on export credit and b) subsidy through export credit insurance and guarantee. Commercial banks provide export financing below the market rates. The interest rates on export credit are now linked to the prime lending rates (PLR) of commercial banks. Commercial banks do not receive subsidies from the government to finance these loans. Commercial banks are required to extend a minimum of 12 per cent of their net credit as export credit. With regard to export finance and guarantees, the objective of the wholly government-owned Export Credit Guarantee Corporation of India Limited (ECGC) is to provide exporters a range of insurance cover against the risk of non-realisation of export proceeds due to political or/and commercial reasons. The ECGC also provides guarantees to financial institutions to facilitate the granting of credit facilities to exporters on liberal basis. The short-term insurance services as well as the credit guarantee business of ECGC have been found to be viable. It is in the medium- and long-term export credit and guarantee business that ECGC has to meet substantial claims leading to negative results.

The prohibited subsidies mentioned above are likely to be countervailed only if these cause adverse effects to interests of the other member countries. A member may not impose a countervailing measure unless it determines that there are subsidised imports, injury to a domestic industry, and a causal link between the subsidised imports and the injury. There are detailed but transparent rules regarding the initiation and conduct of countervailing investigations, the imposition of preliminary and final measures, the use of undertakings, and the duration of measures. However, with respect to countervailing measures, developing country Members’ exporters are entitled to more favourable treatment with respect to the termination of investigations where the level of subsidisation or volume of imports is small. It may take India at least a decade to reach per capita GNP level of $1000. In the meanwhile, serious studies should be undertaken to estimate as to which 4-digit HS heading exports are going to cross the 3.25 per cent barrier. None of the three studies mentioned above have done this. While Hajra (1999) has computed the export share in world trade of certain 3-digit SITC categories, Ahuja (2001) considers sections to be headings but does not compute any percentages. In fact, the text of paragraph 27.6 of the SCM Agreement appears to have lead to this confusion. While discussing export competitiveness of a `product’ exported by a developing country Member, the last but one sentence reads as: "For the purpose of this paragraph, a product is defined as a section heading of the Harmonised System Nomenclature." The two words, viz. "section heading" put together have created this confusion. In fact, there are 99 "chapters" classified under 21 "sections" in the Harmonised Commodity Description and Coding System, popularly known as the HS system. The 4-digit classification of a chapter refers to different "headings". For example, the 4-digit code 06.03 refers the third "heading" under chapter 6, i.e. cut flowers and flower buds; and 4-digit code 62.14 refers to the fourteenth "heading" under chapter 62, i.e. shawls, scarves and mufflers. India and some other developing countries have submitted a discussion paper to the WTO (G/SCM/W/431) dated March 12, 2001 with regard to the possible change regarding Article 27.6 of the SCM Agreement. It asks for increasing the period of establishing export competitiveness for four-figure section headings from two to five years.

Keeping in view the objectives of this study, a cluster-oriented approach has been chosen to collect information from bankers and exporters. Thirty-two export products/ categories were identified for the study clustered across twenty-nine cities/towns. A chosen export product/category may be being produced in one or more cities/towns and a city/town may be having cluster(s) of one or more export products/categories. The lists of export products/categories along with corresponding clustered cities/towns are provided in Tables 3.1 and 3.2. A total of 57 export production clusters have thus been chosen for this study. It was decided that the Survey would include 300 bank branches 1680 exporters.

Getting the requisite information from 300 bank branches and 1680 exporters from all over the country is a challenging task. Separate Questionnaires were designed for bankers’ and exporters’ responses, respectively. A schedule-structured personal interview approach was chosen to collect primary data. This is a less flexible approach of personal interviews since the number and wording of questions remain identical for all the respondents. However, its merit lies in the fact that the interviewer is not permitted to reword a question and hence introduce bias across various interviewers. Even the sequence in which the questions are asked is the same in every interview. The variations between responses can thus be fairly attributed to the actual differences between the respondents and not to variations in the interview. The schedule-structured interview is based on three crucial assumptions:

• That the respondents have a sufficiently common vocabulary so that it is possible to formulate questions, which have the same meaning for each of them.
• That it is possible to phrase all questions in a form that is equally meaningful to each respondent.
• That the meaning and context of each question as well as the sequence of questions must be identical for each respondent.

Despite being a high-cost method when compared with mail questionnaire, the method of personal interviews is expected to result in high response rate and fuller information. Thus, the use of schedule-structured questionnaire-based personal interviews minimises the problem of interviewers’ biases getting introduced in the responses.

The interviewers recruited in all four zones of the country, whether directly by NCAER or through its network institutions, were trained directly as well as supervised by the NCAER field staff.

Two separate questionnaires were prepared: one for bank branches and the other for exporters based on issues relating to simplification of procedures for hassle free delivery of export credit. The RBI had provided us with two sets of issues, one for the bankers and other for the exporters (Annex 1). Keeping in view the list of issues detailed out in Annex 1, an attempt was made to translate the objectives of this study into specific questions based on relevant content, structure, format and sequence.

Due to diversity of the information desired for this study, the content of the questions was factual at times and based on subjective experiences at others. A factual question is designed to obtain objective information from the respondent (see, for example, Question 8 in the banker’s questionnaire). On the other hand, a question based on subjective experience tries to elicit respondent’s belief, attitude, feeling and opinion (see, for example, Question 37 in exporter’s questionnaire).

With regard to the structure of questions, a mix of close-ended as well as open-ended questions has been used in the two questionnaires. A close-ended question offers the respondent to choose one of the options from the ones mentioned (see, for example, Question 14 in exporter’s questionnaire). On the other hand, an open-ended question is left for the respondent to answer with his response being fully recorded (see, for example, Question 42 in banker’s questionnaire).

Responses of the close-ended subjective-experience questions need to be put in an appropriate format. Such questions are based on some form of rating scale with semantic differential on which respondents’ reactions are recorded by asking them to indicate a rating on a bipolar scale defined by contrasting adjectives at each end (see, for example, Question 32 of exporter’s questionnaire).

Finally, it is important to put questions in an appropriate sequence. Two major types of sequences refer to the funnel sequence and inverted funnel sequence. A questionnaire designed in the funnel sequence has questions such that each successive question is related to the previous question and has a progressively narrower scope. The reverse is true in the inverted funnel sequence with narrower questions followed by progressively broader ones. The former approach has been used to design exporter’s questionnaire since the major objective was to gauge their level of satisfaction with export credit delivery mechanism. The questions were sequenced such that the narrower ones followed broader ones, with finally asking exporters "Are you satisfied in an overall sense with your present banker?" (Question 42 in exporter’s questionnaire). On the other hand, the banker’s questionnaire begins with probing into a particular bank branch’s adherence to the RBI guidelines and the sequence of questions is neither "narrowing" nor "broadening". The sequence is say, cylindrical, with almost equal emphasis on various questions for gauging the degree of adherence and efficiency with which the particular bank branch fulfils the expected objectives of export finance provision to its exporting clients.

It is important to deal with three major issues while selecting a sample, viz. a) the definition of population; b) the sample design; and c) the size of the sample. These issues had to be resolved in both the questionnaires, i.e. for bankers’ and for exporters’. Since the export products/categories and the cities were pre-defined, the populations of bank branches as well as exporters were each finite. The information on bank branches providing export finance in different cities was available from the RBI. However, it was difficult to get information on exporters in these cities. Several methods were used to obtain such information, viz. trade websites, export federations and export credit providing bank branches. None of the three methods turned out to be sufficient and hence a combination of all three methods has been used with bank provided addresses being the maximum.

The commercial banks in India are divided among four major groups:

Bank branches may further be divided into different categories on the basis of the services they offer. These are:

Category "A": Branches with ESCROW/VOSTRO/NOSTRO accounts of foreign banks and parties.

Category "B": Other branches

A sample of the bank branches representing all groups and categories was required for the study. The selection was to be based on information of bank branches specialising in various products/ categories and the quantum of their export credit. The bank branches were then to be selected at random from among the responding branches as well as from the information sent to NCAER by RBI.

A total of 1816 bank branches (183 "A" and 1633 "B" category) were identified by the RBI in the identified cities/ towns. The RBI then sent a Circular (dated August 6, 2001) to the Chairmen/ Chief Executives of these bank branches. All these bank branches were instructed to send relevant information on their exporter clients, product coverage and the export credit outstanding, directly to the NCAER research staff. However, the response was poor with only 63 "A" category and 583 "B" category branches responding to the circular.

Keeping in view the possibility of non-responses during the survey, it was decided to select a sample of 370 bank branches. The number of bank branches in each city was selected on proportional basis, i.e. the higher the number of bank branches in a city/ town the higher the number of branches to be selected in the sample. Table 3.3 presents distribution of selected bank branches across 28 cities.

The selection of "A" category bank branches was based on a pre-determined criterion such that all the branches were included in the sample if a city/ town had five or less number of "A" category bank branches. Five branches were included in the sample if the number of such bank branches was between 6 and 10. Only 50 per cent of the branches were to be included in the sample in case the number of "A" category bank branches turned out to be more than 10 in a city.

However, certain exceptions were made for selecting "A" category branches in big cities of Kolkata, and Mumbai. In Kolkata, 12 out of 19 "A" category bank branches were selected in the sample since Kolkata represented five export products/ categories (engineering, jute, leather, tea, and textiles). In the city of Mumbai, 35 out of 85 "A" category bank branches were selected. Mumbai represents four export products/ categories but if more than 35 "A" category branches were to be selected, the representation of "B" category branches would have been much smaller than it now is in the sample. The selected "A" category branches in a city/ town were then divided among four major groups in proportion to their actual distribution. Table 3.4 provides distribution of "A" category bank branches across four bank groups in 28 cities.

Once the "A" category sample was selected, city–wise sample for "B" category bank branches was arrived at by subtracting total sample of "A" category bank branches from the desired total sample for the city. However, this led to a problem of low sample of "B" category bank branches in the cities of Bhadoi, Kanpur and Guntur. Eight additional "B" category bank branches were selected in each of these cities. This resulted in a sample of 282 "B" category bank branches. The branches were then consigned to the four groups of banks following a methodology similar to that followed as in the case of "A" category banks. Table 3.5 provides distribution of "B" category bank branches across four bank groups for 28 cities.

Our sample of 383 branches includes 77 different banks of the country. All the nine banks of Group 1 (SBI and its associate banks) as well as all the 19 banks of Group 2 (nationalised banks) are included in the sample. The sample also includes 28 banks from Group 3 and 21 different banks from Group 4. The names of banks belonging to Groups 3 and 4 are given in Table 3.6.

As mentioned earlier, this study aimed at conducting primary survey of about 1680 exporters of 32 products/ categories drawn from 29 cities from among all the four major zones (NEWS) of India (Tables 3.1 and 3.2). The total clusters of export products were more than 32 since a particular product/ category may be produced in more than one city/ town. The total clusters surveyed turned out to be 57.

The exporters were selected with addresses being taken from various sources, viz. banks, export federations and FIEO. However, the number of exporters in a particular product/ category was based on its export in total export turnover of the country. The weights have been computed as the triennium average for the triennium 1997-98, 1998-99 and 1999-2000 (Table 3.7). The data on exports have been taken from the Directorate General of Commercial Intelligence and Statistics (DGCI&S).

Some of the products/ categories have insignificant weight, say less than 2 per cent, in total exports or else their export values are not separately available. However, to give appropriate credit to exporters of these categories, a simple rule of thumb was used. Purposively, it was decided to cover at least 30 exporters of each of these categories (Table 3.7). However, there were some exceptions. The number of exporters to be surveyed for bicycles and iron ore is each less than 30 due to less number of actual exporters. On the contrary, we would have to take a very large number of exporters of diamonds, gems and jewellery since their weight in exports is above 21 per cent. The number turns out to be above 350 if we take 21 per cent of 1680 exporters to be analysed. We have purposively selected only 60 exporters of diamonds, gems and jewellery to be analysed since these exporters are likely to be too few and too large. In the case of textiles and readymade garments the weights are above 14 per cent for each of the two categories. Though the sample selected in each of these two categories turns out to be about 240, we have purposively desired 375 exporters in each of these product categories. This has been done since the exporters in these categories are too many but not too large. In the case of diamonds, gems and jewellery, 20 exporters were to be selected from each of the three cities being analysed. The numbers of textile-exporters were desired at 75 from each of the five cities being analysed and for readymade garments at 125 from each of the three cities being surveyed for this product category.

This may, however, be observed from Table 3.7 that export units, which could actually be surveyed, differ from the original targets as well as the desired sample numbers. The survey team ended up with an over sample of 2090 exporters, compared with the original target of 1680, to keep the eventuality of non-responses in view. This has been due partly to non-availability of a meaningful database of actual exporters and partly to hesitation of the bank branches to provide information about their exporter clients. According to our earlier plan, we desired to get about two-thirds of exporters’ addresses from their banks only one-third from other sources. The story has turned out to be just the reverse. Banks have provided only one-third of the addresses of the 1762 exporters actually surveyed. The total number of exporters surveyed at 1762 has turned out to be about 5 per cent more than the original target of 1680.

The exporters’ sample from each city was expected to be a mix of small, lower-medium, medium and large exporters in the ratio of 2:2:1:1 (see Box 3.1). This ratio was indicative and could not be followed uniformly. However, the emphasis was to provide greater weight to relatively small exporters.

Certain other changes from the original design were also made in some of the cities due to the paucity of exporters’ numbers for whom the information could be made available. For example, we had to shift our focus from Aluminium exporters to marine/ seafood in Bhubaneswar. The emphasis had to be shifted from exporters of light-engineering goods to exporters of tobacco in Guntur.

The Questionnaire for the banks has been divided into seven parts covering different aspects of export finance. These are:

1. Branch Information,
2. Sanctioning of Credit Limits,
3. Pre Shipment Credit,
4. Post Shipment Credit,
5. Utilisation of Delegated Powers,
6. Exporters Grievances, and
7. Availability of Trained Staff.

Branch information deals with the basic characteristics of the branch. The main features of this part include factors considered for sanctioning loan to new exporters; branch awareness about ECGC classification of countries; catering to the needs of small exporters; export credit turnover; the number of exporter clients; the maximum amount sanctioned to a single exporter; and export credit target of the branch.

Sanctioning of credit limits deals with documents required for sanctioning of limit, method of assessing working capital requirement, sanctioning power of the branch, margins stipulated, time taken for sanctioning of limits, processing fee for sanctioning credit limits. It also deals with the method followed by the branch for sanctioning export finance higher than their sanctioning power along with procedural aspects for ad-hoc finance, consortium finance and multiple banking. Finally, it looks into the frequency of renewal of credit limits, concessions to exporters with good track record and interchange of pre and post shipment credit limits.

Pre–shipment credit part of the questionnaire deals with documentary requirements for releasing pre–shipment credit; basis for allowing running account facilities; check on end utilisation of export credit and maximum time period allowed for export credit; information on the prerequisites for availing export credit in foreign currency; and the minimum amount and interest rate charged on the loan in foreign currency.

Bill financing part deals with the formalities such as documents required; consultancy firm used for status report of buyer; time taken for despatching documents; credit recovery rates; and problems related to defaulters and ECGC.

Utilisation of delegated powers relates to gauging the bank’s ability for actually using the powers delegated to it or to the head office by the RBI.

Exporters’ grievances part makes an attempt to register issues relating to the approach of the bank branch towards resolving problems faced by the exporters with regard to export finance and providing help and guidance to their exporter clients.

Finally, the availability of trained staff has been gauged through inspecting the quality of staff deputed in the FOREX counter of the bank branch being covered.

The questionnaire for exporters has been divided into seven parts on the bases of the information required from them with regard to their level of satisfaction with the existing facilities of the short-term bank finance being made available to them for their working capital requirements. These include:

1. Introduction,
2. Sources of finance,
3. Sanction of credit limits,
4. Post-sanction disbursal and services,
5. Utilisation of delegated powers by the banks,
6. Impressions about the bank services, and
7. Suggestions.

Introduction of the exporter attempts to elicit some general information about the exporter including turnover, products exported; whether from private or public sector; and whether manufacturer exporter or merchant exporter, etc.

Sources of finance provide information on the type of finance facilities used by the exporter being surveyed during 2000-01. It also seeks to find out the type of banks used by the exporter.

Sanctioning of credit limits refers to one of the most important aspects of this study. It deals with issues relating to the availability of the pre and post shipment finance to the exporters by the banking system. Questions in this section deal with procedural hassle, method of assessing working capital requirement, exporters’ satisfaction with terms and costs of the sanctioned credit, and the role of ECGC in the sanction process.

Post-sanction disbursal and services reflect the operative part of the sanctioned finance and the timeliness of credit provision by banks to exporters for pre and post shipment credit. Questions in this section seek to elicit cost information on interest and other charges levied by the banks. Questions also relate to adequacy and timeliness of ECGC claims.

Utilisation of delegated powers by the bank branch addresses the degree of pro-active approach followed by a bank branch with regard to helping exporters through optimum use of powers delegated to it by the RBI stipulations and the head-office. Exporters are also requested to rate the degree of permissible flexibility in banks’ working.

Impressions about the bank services are obtained from exporters through asking questions like the quality of the bank staff dealing with export credit, helpful attitude of the banks towards resolving exporters’ credit related problems, and the degree of modernisation in the work processing by the banks. Exporters’ views on their level of satisfaction with adequacy and efficiency of export credit delivery system are also recorded.

Suggestions made by exporters for improvement in the export credit delivery system are sought under this section.

The field staff while conducting survey for the banks encountered two types of problems. Firstly, there was a problem of non-response due to indifferent attitude of some of the bank staff. Secondly, some of the branches mentioned as "A" category either turned out to be "B" category or else they were not disbursing export credit directly to the exporters. Instead, they were disbursing export credit to the customers of their other branches, which were not authorised as foreign exchange dealers. Consequently, we were able to interview only 59 "A" category bank branches instead of the desired 75. Table 3.8 provides distribution of "A" category bank branches interviewed for the study. These include 5 bank branches in Group-1, 34 in Group-2, 6 in Group-3, and 14 in Group-4.

Among the "B" category bank branches, 268 bank branches were interviewed, which were more than the desired 225 (Table 3.9). These include 61 bank branches in Group-1, 136 in Group-2, 61 in Group-3 and 10 in Group-4.

Thus, the total bank branches interviewed, both in "A" as well as "B" categories, were 327, i.e. 9 per cent more than the desired 300.

The total number of exporters with valid responses turned out to be 1762. The city-wise coverage of the surveyed exporters is shown in Table 3.10.

It may be observed that Mumbai has the highest coverage of exporters (13.4 per cent) and is followed by Kolkata (9.2 per cent), Chennai (8.3 per cent), Jaipur (7.8 per cent) and New Delhi (6.9 per cent). The least coverage is for the city of Mangalore (0.1 per cent) mainly because of non-availability of the exporters in the specified product category, i.e. marine products. In order to fulfil the sample coverage for this product in the region, the NCAER field-staff has increased the number of exporters surveyed in the same product category in Kochi (including Alleppey).

The product-coverage of the exporters is shown in Table 3.11. The sample coverage is the highest for readymade garments (21.2 per cent) followed by textiles (14.7 per cent), engineering products (8.5 per cent), leather products (6.1 per cent), diamonds, gems and jewellery (5.8 per cent), seafood (4.0 per cent), handicrafts (4.0 per cent) and hosiery products (3.0 per cent). Because of the existence of a few but large firms in the export business, the sample coverage for aluminium, and cycles, etc. have remained low.

The sample coverage in terms of size classes is shown in Table 3.12. It may be observed that the proportion of small exporters is the highest in the western region, followed by the southern, northern and eastern regions. The maximum exporters in each of the four regions lie in the lower-medium category. The target proportion for the four different size categories was hypothesised as 2 : 2 : 1 : 1. The actual distribution has turned out to be in the ratios 0.8 : 2.8 : 1.3 : 1.1. This implies that we have been able to achieve about 90 per cent success in including small and lower-medium exporters in this survey.

The city-wise distribution of exporters in size classes is given in Table 3.13. It may be observed that the city of Mysore represents the highest proportion of small sized exporting units (50 per cent), followed by Pune (48 per cent), Jalandhar (38 per cent) and Coimbatore (28 per cent). It may also be observed that in terms of percentage, the coverage of the lower medium sized exporting units for all the cities in aggregate is the highest.

The distribution of the exporting units in size classes for different product categories are given in the following Table 3.14.

The scheduled commercial bank responses have been analysed for 327 bank branches selected from 4 different types of banks spread over 28 different cities belonging to 4 major zones (NEWS) of India. The exporter responses have been analysed for 1762 exporters selected from 32 product categories spread over 29 cities belonging to 4 major zones of the country. In all, 57 export-product clusters have been investigated in this all India based survey. Such diverse samples of bank branches and exporters are expected to yield meaningful and important results on the major objective of the present study, namely Indian exporters’ satisfaction with the export credit delivery system of the scheduled commercial banks of the country.

Table 1.1 of Chapter 1 provides details about the interest rate ceilings on export credit of the scheduled commercial banks as laid out by the Reserve Bank of India with effect from September 26, 2001. The RBI also directs the banks to provide 12 per cent or more of their net bank credit towards export finance. As mentioned in Chapter 3, Annex 1 provides an outline of the RBI guidelines to banks as well as expectations of the exporters from the export credit delivery system currently in practice. Most of our analysis would thus be based on issues put forward in Annex 1.

The present chapter has been divided mainly into two parts. The first part deals with survey findings with regard to the export credit system as it is practised by India’s scheduled commercial banks. The bank responses have been categorised according to bank group as well as zone. The tabulation of results is provided at the end of this chapter as Tables 4.B1 to 4.B81. We shall discuss in this part and comment upon bankers’ adherence to RBI guidelines on export finance using the tables of results as well by creating an "index of adherence".

The second part of this chapter deals with exporters’ satisfaction with export credit delivery system. Exporters have been categorised into nine major product categories as well as on the basis of their size based on their export turnover in 2000-01 (small, lower-medium, medium and large). They have also been classified into categories depending on their association with the major credit-providing bank group (SBI, nationalised, private and foreign) and zone (NEWS) in which these operate. Observations on exporters’ satisfaction with export credit delivery system are provided in this part based on Table 4.E1 to 4.E94. Exporters’ overall level of satisfaction as disclosed by them in Question 42 of the exporter’s questionnaire has been analysed both through critical discussion as well as using simple econometrics. A separate "exporters’ satisfaction index" is created through analysing some of the questions answered by them during the course of discussion with them based on questionnaire for them.

As already mentioned, 327 bank branches from all four groups of banks in four regions of India were surveyed for the study. Region-wise and bank-wise tabulations of the responses of the banks are provided at the end of the chapter (Table 4.B1 to Table 4.B81). Tables are divided into seven different sections corresponding to each section of the questionnaire. We provide major observations on banks’ responses in the sub-section 4.2.1. We have also analysed "bankers’ adherence to RBI guidelines" in the sub-section 4.2.2.

4.2.1.A Branch Information

1. "Manufacturing for exports" is the most common purpose for which export finance is provided by the scheduled commercial banks under survey with more than 95 per cent bank branches across the country having answered in affirmative (Table 4 B)1, Chart 5.1)³. The percentage is above 90 for all groups and zones. Two other common purposes turn out to be financing "import of raw-materials for export production" and "merchant exporters" with more than 60 per cent exporters having responded in affirmative for each of these two ⁴. Financing for "deferred payment exports" is not common among banks except for some interest among foreign bank branches (4.B2, Chart 4.2). Around one-tenth of all the banks seem to be taking some interest while leaving the major share of business for EXIM Bank.

2. Around 95 per cent banks give credit to new exporters. More than 90 per cent of the bank branches in all zones and groups provide such credit except foreign-banks (4.B3). Only 84 per cent of the responding foreign bank branches provide export credit to new exporters.
3. The major criteria that most of the banks keep in mind while sanctioning credit limits include exporter’s financial position, potential, experience, and credit history (4.B4). Despite RBI’s discouragement, more than 84 per cent of the bank branches keep their eyes on collateral security with north zone, and nationalised and private group bank branches insisting more on it relative to others.
4. Banks do not seem to be showing much interest in providing finance for purchase of capital goods required for export promotion or promoting research and development (R&D) activities for encouraging export production (4.B5 and 4.B6). About one-third bank branches fund these activities with those in south zone and nationalised group doing somewhat better in relative terms. Only one-fifth bank branches provide such credit at concessional rates of interest with relatively better performance by branches in north zone, and SBI and nationalised bank groups (4.B7).
5. About 85 per cent of bank branches are aware of ECGC risk classification of destination country (4.B8). Banks have their own criteria for avoiding credit to exporters with buyers in different risk-classified countries. Foreign banks are liberal about granting credit for export to countries with relatively high-risk classification (4.B9).
6. Around three-fourths bank branches cater to the needs of small exporters, i.e. with export turnover less than Rs. 50 lakhs. Bank branches in east zone and foreign group categories are relatively more conservative than others (4.B10).
7. A majority of bank branches have not responded to the question on amount of pre- and post-shipment credit disbursed by these during 2000-01 (4.B11 and 4.B12, Chart 4.3 & 4.4). However, they were forthcoming in providing the crucial information that 39 per cent of them had export-credit to total-credit ratio of less than 20 per cent with the other extreme being 15 per cent branches maintaining this ratio between 80 to 100 per cent (4.B13, Chart 4.5).
8. While only 17 per cent bank branches provide a single-party loan of less than Rs. one crore, twice this number (34 per cent) report this figure at Rs. 10 crore (4.B14).
9. More than half the bank branches (56 per cent) have provided pre-shipment export finance to less than 10 exporters each with only 10 per cent having provided the same to more than 30 exporters (4.B15). Figures for post-shipment finance are nearly the same, 53 and 14 per cent, respectively (4.B16).
10. While about half the bank branches had no fixed target of achieving export credit for the year 2000-01, nearly one-third branches have reported that they had over-achieved their "targets" (4.B17).

4.2.1.B Sanctioning of Credit Limits

1. The two most important documents required by the banks before they sanction credit limits to banks’ exporter clients are a) past performance including audited balance sheets, and b) letter of credit (LC) or confirmed order (4.B18). The two most commonly used methods for assessing working capital requirements of banks’ exporter clients are a) projected balance sheet method, and b) turnover method (4.B19).
2. About three-fifths of the responding bank branches from all over the country have branch level sanctioning power up to Rs. 5 crore and only one-fifth have it above Rs. 10 crore. Foreign bank branches have higher sanctioning power relative to others (4.B20). As a result, requests for credit limits above the branch-level powers are less common in foreign bank branches as compared with others bank branches (4.B21).
3. Banks may be well advised to expedite the process of sanctioning credit limits for requests beyond the branch’s power. Less than two-fifths of the surveyed bank branches send such requests simultaneously to the regional office as well as to the appropriate sanctioning authority. Private bank branches (Group 3) are relatively more efficient than others with above 50 per cent branches undertaking both these steps simultaneously (4.B22). However, five-sixths of the bank branches at all-India level attest that the method of sanctioning additional ad-hoc finance is simpler than the original with private bank branches being relatively most efficient while the SBI branches the least so (4.B23).
4. About three-fifths of the bank branches prefer to undertake a "self-assessment" rather than accept the assessment by the "lead bank" in the case of consortium finance. Only one-fourth of the surveyed bank branches accepts lead bank’s assessment. The insistence on self-assessment is visibly high in foreign and private banks and relatively low in SBI and nationalised banks (4.B24). Less than half the surveyed bank branches agree to "multiple banking" with SBI and nationalised bank branches being much less eager to grant such permission and foreign banks readily accepting such an agreement (4.B25). The most commonly accepted security covers under multiple banking include "pari-passu on assets" and "specific collateral security" (4.B26).
5. The frequency of renewal of credit limits by a majority of the surveyed bank branches is once a year with more than 96 per cent bank branches under all groups attesting to this statement (4.B27). There is a near unanimous view that the speedy credit sanctioning is based on the track record of the exporter-clients (4.B28).
6. The years of sluggish export growth impact negatively upon liberal sanctioning of export credit. About half the surveyed bank branches have no provision for liberal sanctioning while less than half continue with liberal sanctioning procedures with about 4 per cent not having responded (4.B29). While SBI and nationalised banks continue to remain relatively liberal, only one-fourth of the foreign bank branches maintain a bold face with two-thirds shirking away from liberal sanctioning.
7. More than three-fourths of the surveyed bank branches agree to interchange between pre- and post-shipment credit limits (4.B30). Such acceptance is relatively high in the case of foreign banks and low in the case of private banks.
8. Banks do not vary their interest rates for providing export credit across exports of different goods (4.B31).
9. The pre-shipment credit margins kept by the bank branches exhibit a bi-modal frequency distribution. While three-fifths of the bank branches specify pre-shipment credit margin between 21-25 per cent, one-fourth put margins between 1-10 per cent only (4.B32). A majority of foreign bank-branches specify relatively low pre-shipment credit margins between 1-10 per cent and one-fifth of them specify it in each of the two margin ranges of 11-20 and 21-25 per cent.
10. In the case of post-shipment credit, a majority of the bank branches (more than three-fifths) do not specify any margin (4.B33). Margins of 6-10 per cent are specified by 23 per cent of the bank branches, of 11-15 per cent by 3 per cent of the bank branches and above 15 per cent by 12 per cent of the bank branches. Interestingly, bank branches in the east zone of the country specify the lowest margins on post-shipment export credit.
11. More than 90 per cent of all bank branches adhere to the RBI’s guideline on sanctioning fresh credit limit within 45 days with the exception of about one-seventh of the SBI branches reporting time taken above 45 days (4.B34). About 5 per cent each of nationalised and private bank branches have also declared themselves as defaulters of their guidelines. In the case of sanctioning of enhanced credit limit, more than 98 per cent of the surveyed bank branches adhere to the RBI guideline of 45 day-limit (4.B35). Renewal of the existing credit limit is done within 30 days as specified by the RBI except by about 5 per cent defaulters (4.B36). In the case of grant of ad-hoc credit limits, 88 per cent of the bank branches adhere to the RBI guideline of 15-day limit with foreign banks being most efficient and SBI branches least so (4.B37). Post-shipment credit limit is invariably sanctioned within 45-day limit by all the bank branches (4.B38, Chart 4.6).

12. The processing fee charged by a majority of bank branches (82 per cent) for fund based credit varies between 0.06 to 0.30 per cent with only about 14 per cent of the bank branches charging above 0.30 per cent. The modal all-India value lies between 0.06 and 0.10 per cent with 31 per cent of all bank branches charging this rate. Interestingly, a majority of foreign bank branches (79 per cent) charge relatively low fee between 0.06 to 0.10 per cent while a majority of SBI branches (68 per cent) charge relatively high fee of 0.21 to 0.30 per cent. The modal value for nationalised banks lies between 0.11 to 0.20 per cent with 41 per cent bank branches charging this rate. Private banks display bimodal tendency with about 30 per cent bank branches charging a low rate between 0.06 to 0.10 per cent and 37 per cent branches charging a rate above 0.30 per cent (4.B39).
13. In the case of sanctioning non-fund based credit limits, the modal class lies between above zero and below 0.05 per cent rate with 32 per cent bank branches charging this rate. Other features are similar to the fund-based interest charges with four-fifths of the foreign bank branches charging a relatively low rate of interest above zero and below 0.05 per cent and 50 per cent of the SBI branches charging rate between 0.21 to 0.30 per cent. Private banks turn out to be by far the highest interest charging group (4.B40).

4.2.1.C Pre-Shipment Credit (Packing Credit)

1. About 89 per cent of the surveyed bank branches require confirmed order / LC before the release of pre-shipment credit with private banks being the strictest about this requirement. Other documents / requirements such as DP note, monitoring stocks/ hypothecation, and ECGC cover are of much less importance (4.B41).
2. The running account facility is provided by 68 per cent of the surveyed bank branches with relatively more SBI and foreign bank branches (above 75 per cent each) providing this facility. Only 69 per cent of the nationalised bank branches and 54 per cent of the private bank branches provide this facility to their exporter-clients (4.B42). The time permitted to submit LC is generally 15 to 30 days (4.B43). Past record is the most important basis for providing the running account facility (4.B44).
3. There has been no meaningful response to questions relating to export credit in foreign currency with more than 80 per cent bank branches not responding. These questions included queries with regard to the loan amount and interest rate stipulated for export credit in foreign currency (4.B45 to 4.B48).
4. The two most important methods used by the bank branches to ensure proper utilisation of the export credit include a) periodic confirmation from the client including inspection and personal visit by the bank staff, and b) monitoring the bank account (4.B49). The time duration for the packing credit generally varies between 136 and 180 days (4.B50).

4.2.1.D Post-Shipment Credit (Bill Financing)

1. The post-shipment credit (bill financing) is provided to the exporters after the shipment of the consignment. The documents required by the bank branches commonly include one or more of: a) original bill of exchange, b) invoice, c) original documents of shipping such as customs inspection certificate and the bill of lading, d) GR/SDF forms etc., and e) ECGC cover and other necessary security documents (4.B51).
2. About 90 per cent of the surveyed bank branches insist on checking "status report" of the buyer to whom the consignment is being exported. The only exception is foreign banks where only half the total surveyed branches insist on such check (4.B52). ECGC and Dun and Bradstreet are the two common sources used for checking the status report of the buyer with about three-fourths of the surveyed bank branches using either one of these two or both simultaneously. Only about 15 per cent bank branches use other than these two sources. Relative to Indian banks, foreign banks rely more on "other" sources with one-third of their branches relying on other sources with only one-sixth of their branches using Dun and Bradstreet and none using ECGC reports (4.B53).
3. Nearly four-fifths of the bank branches claim that they dispatch export documents for realisation of export proceeds within one day while nearly all accomplish such dispatch within two days (4.B54).
4. A majority of the banks compensate exporters for delay in realisation in crediting export proceeds to exporters account (4.B55).
5. Less than one-tenth of the bank branches are not able to recover 20 per cent or more of the export credit advanced. All groups of banks, except Indian private banks, do quite well reporting a recovery rate above 90 per cent (4.B56). Recovery rates of "other than export credit" are relatively poor when compared with recovery rates of export credit with the exception of foreign bank branches (4.B57).
6. Banks use various methods to recover dues of export credit from defaulters. The commonly used methods include a) persuasion, b) follow up with buyer or buyer’s bank, c) getting the client downgraded at ECGC, and d) claims from ECGC. Less than half the surveyed bank branches also proceed ahead to take legal action against the defaulters. While the SBI and nationalised banks seem relatively more eager to take legal action, the foreign banks appear to be much less interested in suing their defaulters. Legal action seems relatively more common among the bank branches in north zone and least so in east zone (4.B58).
7. Banks observe various reasons leading to non-recovery of export credit advanced by them and there is no clear pattern as to why clients fail to pay back their dues to banks in time (4.B59).
8. About 53 per cent of all bank branches are "satisfied" with the extent of coverage under ECGC guarantee scheme. While 65 per cent of the SBI bank branches report such satisfaction only 46 per cent of the private banks seem satisfied. The proportion is 52 per cent for nationalised banks and 50 for foreign banks. Interestingly, about 38 per cent of the foreign bank branches prefer to be in "non-response" category rather than saying "satisfied" or "not satisfied". The non-response category is negligible in the remaining bank groups (4.B60).
9. One-third of the bank branches desires the pre-shipment ECGC guarantee to cover 100 per cent risk (4.B61). Two-fifths of the bank branches expect post-shipment ECGC guarantee to cover 100 per cent risk (4.B62).
10. About one-fifth of the bank branches find their association with ECGC "very helpful" while another two-fifths report it as "helpful". While more than 20 per cent of the SBI and nationalised bank branches rate their association with ECGC as "very helpful", which is high relative to only 8-9 per cent of private and foreign bank branches saying so. Interestingly, the proportion of SBI and nationalised banks rating their association with ECGC as "not helpful" is also relatively high when compared with private and foreign bank ratings (4.B63).

4.2.1.E Utilisation of Delegated Power

1. Nearly two-thirds of the bank branches allow trade discount at the branch level with private bank branches playing relatively active role and SBI branches doing it at relatively low key (4.B64). Nearly three-fifths of all the bank branches allow reduction in invoice value at the branch level with proportion of foreign bank branches in their total being relatively high and that of SBI relatively low (4.B65). However, the decision of writing off the unrealised bills is taken mainly at regional/head office level except in the case of private bank branches (4.B66).
2. One-fourth of the bank branches provides export credit on elongated terms with foreign banks taking much more interest than other bank groups (4.B67).
3. Nearly three-fourths of the bank branches permit late submission of export documents foreign and private bank branches being more liberal than SBI and nationalised bank branches (4.B68). Branch level powers of granting permission for extension of time for realisation of proceeds are relatively high in the case of foreign banks but relatively low in the case of SBI and nationalised banks (4.B69). A similar observation can be made in the case of granting refund of export proceeds in the case of rejected goods (4.B70) and settling export claims (4.B71).

4.2.1.F Exporters’ Grievances

1. About three-fifths of the bank branches have never received any exporters’ grievances. While 67 per cent of the foreign bank branches have made this claim only 55 per cent of the SBI branches have made such claim. Nearly 36 per cent of the bank branches receive exporters’ grievances only occasionally with 41 per cent of SBI branches and 33 per cent of the foreign bank branches saying so (4.B72).
2. Nearly 55 per cent of the bank-branches address exporters’ grievances through providing appropriate and timely help. Whereas a relatively high proportion of 58 per cent of the nationalised bank branches have made this claim, only 50 per cent of the foreign bank branches have done so (4.B73).
3. Nearly one-fifth of the bank branches have never organised an exporters’ meet another one-fifth organise it once in three months. One-third of the bank branches organises such meet once in more than three months. Whereas 46 per cent of foreign bank branches report to have never organised an exporters meet only 13 per cent of the nationalised banks have never done so (4.B74).
4. Nearly four-fifths of the banks help exporters to realise their dues from the buyers with SBI branches not taking such active role. Exporters in north zone seem to be getting more help from their bankers as compared with exporters from west (4.B75).
5. Banks provide various other export-promotion services to their clients. Nearly one-third of the bank branches provide information about prospective markets/buyers to their clients with SBI and foreign bank branches playing relatively more active role and east zone appearing on the higher side. Nearly 12 per cent of the bank branches keep their clients alert about international risks and opportunities with private banks playing relatively more active role and west zone appearing on the higher side. Only one-tenth of the bank branches provide information to their clients about changes in domestic rules / procedures (4.B76).

4.2.1.G Availability of Trained Staff

1. Nearly 88 per cent of the banks send their staff for attending training courses on export operation / policy (4.B77).
2. More than two-thirds of the bank branches have managerial staff of up to three persons in their FOREX department (4.B78). Less than 50 per cent of the bank branches have other staff of up to three persons in their FOREX department (4.B79).
3. The average experience of the managerial staff in FOREX department is above three years in 43 per cent of the bank branches. The percentage of bank branches reporting such a length of experience of the managerial staff is relatively high in nationalised banks and low in foreign banks. While two-thirds of the bank branches in north zone report average managerial experience of more than three years only one-tenth of the bank branches in south zone report thus (4.B80, Chart 4.7). A near similar experience rating has been reported for other than managerial staff in the FOREX departments of various bank branches (4.B81, Chart 4.8).