India is extending interest subsidies to non-bank lenders for the first time in a move industry says could transform access to working capital for the country’s millions of small exporters.
The Indian government said medium- and small-sized exporters can now receive 2.75% rebate on interest charged by regulated non-banking financial companies (NBFCs) factors, a type of support that is already in place for traditional lenders.
The interest rate subsidy will be applied to the factoring discount rate charged by the provider – which means when exporters sell invoices to factoring companies to get cash early, the government will subsidise 2.75% of the financing cost the factoring company charges – capped at Rs50 lakh (around US$55,000) per company per financial year.
The announcement was part of a Rs25,060 crore (US$3bn) package introduced by commerce minister Piyush Goyal last month designed to reform the country’s trade and export finance sectors.
The new rules are set to “level the playing field” for non-bank lenders and boost a factoring market that has long struggled to compete with traditional bank credit, industry figures in India have said, while opening a new working capital channel for medium- and small-sized exporters.
“Rather than relying only on the traditional banking mechanisms, the government now understands that modern tools like factoring are more of an enabler so there is a huge push to move towards those,” said Ravi Valecha, CEO of India Factoring, a provider of export factoring and supply chain finance in India and a subsidiary of Fimbank.
“This will provide an incentive for the customers to go towards [factoring] as it relieves quite a good portion of cost for the exporter,” Valecha said, including costs that may arise “because of global inflation or other geopolitical reasons”.
“That will broaden the horizon and coverage for most of the exporters, and they will be doing more and more exports in the future,” he added. The scheme will specifically target MSMEs, first-time exporters and labour-intensive sectors such as textiles, leather, gems and jewellery, the government said.
Both recourse and non-recourse factoring are eligible, and transactions can be denominated in Indian rupees or any freely convertible foreign currency.
Only factoring companies regulated by the Reserve Bank of India or the International Financial Services Centres Authority (IFSCA) in the Gift City free zone can qualify.
The interest subsidy rate is set to be reviewed biannually and benchmarked against global factoring costs, with revisions expected in late March and September.
The latest overhaul consolidates legacy interest rebate schemes into a single digital framework that is currently being piloted, with around 3,000 exporters having already registered for interest support since January, according to government figures.
Companies can use the platform to submit their rebate request with the factoring firms, who then decide whether to approve it and file it with the regulator. The government will then “enable whatever [interest subsidy] amount is eligible to be credited directly to the customer”, Valecha said. “It’s a fully digitised mechanism.”
He added the platform was “straightforward”, although its use would require “a bit of educating and making customers aware – but that’s the job of financial institutions like us, along with the industry bodies, and we are promoting it now to customers”.
Export ambitions
The government announcement comes after years of discussions between ministers and the trade finance industry and is part of India’s wider Export Promotion Mission (EPM), which aims to bring millions of small businesses into global trade as the country pushes towards its US$2tn export target by 2030.
“The Export Promotion Mission will facilitate export factoring as an attractive alternate trade finance instrument and affordable working capital solution,” said Ankit Bansal, an international trade and investment expert who has been closely involved in developing the new reforms.
The initiative will “create equal opportunities and level playing field for all” and represents “a big win for NBFCs”, he added.
Bansal said that lack of awareness of factoring options, as well as costs, had previously been a challenge for the sector in India.
But recent government marketing campaigns to boost awareness and new rules to make access to trade finance and export credit more affordable were set to bring more companies into the factoring market, he said.
The country’s major factoring firms are India Factoring and SBI Factors, as well as the government-backed Exim Finserve, a subsidiary by the Export-Import Bank of India launched in 2023.
In addition to the new export factoring incentives, the EPM includes a range of other measures to boost international trade, such as collateral-free credit guarantees of up to 85% for micro and small exporters, capped at Rs10 crore (just over US$1mn) per exporter, and dedicated credit facilities for e-commerce exporters offering up to 90% guarantee coverage and the same 2.75% interest subvention.
A risk-sharing instrument for exporters entering high-risk or frontier markets, with coverage of between 10% and 90% of transaction value, has also been introduced.
In other recent efforts to modernise India’s international trade landscape, the commerce and industry ministry also recently put forward a draft bill proposing that electronic trade documents be given equal legal footing to the traditional paper versions.
