Interest Equalisation Scheme (IES)

The Interest Equalisation Scheme (IES) is a government initiative designed to promote exports by providing subsidised interest rates on pre-shipment and post-shipment export credit. The scheme aims to make Indian exporters more competitive in international markets by reducing the cost of borrowing. Implemented by the Government of India through the Reserve Bank of India (RBI), the IES serves as an important component of India’s export promotion strategy, particularly benefiting Micro, Small and Medium Enterprises (MSMEs) and manufacturers operating in labour-intensive sectors.

Background

The Interest Equalisation Scheme was first introduced on 1 April 2015 as part of the Foreign Trade Policy (FTP) 2015–2020. It replaced the earlier Interest Subvention Scheme for exporters, broadening its coverage and simplifying procedures. The objective was to offset the disadvantages faced by Indian exporters due to high domestic interest rates compared to global benchmarks.
Initially, the scheme offered an interest equalisation (subvention) of 3% on export credit to eligible manufacturers and exporters in specified sectors. Over the years, the government reviewed and extended the scheme, with revisions to rates, eligible sectors, and validity periods. Its administration is managed through the RBI, which notifies operational guidelines to all banks providing export credit.
The scheme has been periodically extended, the latest extension running up to 30 June 2024, ensuring continuity in export credit support during uncertain global trade conditions.

Objectives of the Scheme

The primary objectives of the Interest Equalisation Scheme are to:

• Enhance Export Competitiveness: Lower the cost of export credit, allowing Indian exporters to compete with global producers who often enjoy cheaper financing.
• Support MSMEs: Provide financial relief to smaller exporters who face high borrowing costs and limited access to formal credit.
• Encourage Manufacturing Exports: Stimulate production and employment in export-oriented sectors by reducing financial burden.
• Ensure Inclusive Growth: Enable smaller players, especially in traditional industries such as textiles, handicrafts, and leather, to sustain their global market presence.

By bridging the gap between domestic and international financing costs, the IES promotes a stable and competitive export environment.

Coverage and Eligibility

The scheme covers pre-shipment and post-shipment rupee export credit—short-term working capital loans provided to exporters before and after shipment of goods.
Eligible Beneficiaries:

1. Manufacturing and Merchant Exporters in specified tariff lines.
2. MSME Exporters across all sectors, irrespective of the product category.
3. Exporters in Labour-Intensive Sectors notified by the Directorate General of Foreign Trade (DGFT).

Ineligible Categories:

• Exporters receiving credit in foreign currency.
• Exporters dealing exclusively in services (except those linked to merchandise exports).
• Units operating in Special Economic Zones (SEZs), as they already enjoy tax concessions.

Rate of Interest Equalisation

The rate of interest equalisation is determined by the government based on prevailing credit market conditions. The rates have been revised periodically to reflect economic realities.

• Original Scheme (2015): 3% subvention for 416 tariff lines and all MSME exporters.
• Revised Scheme (2019): 5% for MSMEs and 3% for specified non-MSME exporters.
• Current Rates (from 1 October 2021):
  • 3% for manufacturers and merchant exporters in eligible sectors.
  • 2% for MSME exporters across all sectors.

Banks pass on the benefit of interest equalisation directly to eligible exporters by charging reduced interest rates on export credit. The differential is later reimbursed to the banks by the Reserve Bank of India, based on government allocation.

Operational Mechanism

The operational framework of the IES functions through coordination between exporters, banks, the RBI, and the Directorate General of Foreign Trade (DGFT).

1. Application: Exporters apply for pre-shipment or post-shipment rupee export credit through authorised banks.
2. Verification: Banks verify eligibility based on exporter classification (MSME/manufacturer) and product category as per notified tariff lines.
3. Interest Adjustment: Banks reduce the applicable interest rate by the prescribed percentage (2% or 3%) at the time of sanctioning credit.
4. Reimbursement: Banks periodically submit claims to the RBI for reimbursement of the interest differential provided to exporters.
5. Monitoring: The RBI and DGFT monitor disbursement and ensure compliance with scheme guidelines.

To maintain transparency, exporters are required to submit a self-declaration confirming their eligibility under the scheme.

Sectors Covered under the Scheme

The IES primarily targets sectors that are labour-intensive and have high export potential. These include:

• Handicrafts and Handlooms
• Leather and Footwear
• Textiles and Readymade Garments
• Marine Products
• Engineering Goods
• Toys, Sports Goods, and Bicycles
• Agricultural and Processed Food Products
• Gems and Jewellery (select categories)

The inclusion of such sectors ensures that the benefits reach industries that contribute significantly to employment and foreign exchange earnings.

Financial Allocation and Implementation

The scheme is implemented through a budgetary allocation by the Ministry of Commerce and Industry, under which the Directorate General of Foreign Trade (DGFT) releases funds to the Reserve Bank of India. The RBI, in turn, disburses the funds to banks as reimbursement for the subvention provided to exporters.
For effective monitoring, banks are required to maintain detailed records of eligible transactions and submit quarterly claims. The government periodically reviews utilisation levels and beneficiary coverage to ensure targeted delivery.

Advantages of the Interest Equalisation Scheme

The IES has contributed significantly to India’s export growth and competitiveness. Its major benefits include:

• Reduced Cost of Borrowing: Lowers the effective interest rate for exporters, improving cash flow and profitability.
• Enhanced Export Competitiveness: Enables Indian goods to compete effectively in global markets by narrowing the financial gap with foreign competitors.
• Support for MSMEs: Strengthens the financial viability of small exporters and promotes inclusive economic growth.
• Employment Generation: Indirectly promotes job creation by supporting manufacturing and export activities.
• Stabilisation of Export Sectors: Provides a counter-cyclical buffer during periods of global uncertainty or reduced demand.

Limitations and Challenges

While the Interest Equalisation Scheme has been beneficial, certain challenges persist:

• Administrative Delays: Banks often face delays in reimbursement, affecting liquidity and scheme effectiveness.
• Limited Awareness: Many small exporters remain unaware of the scheme’s benefits or eligibility requirements.
• Data Verification Issues: Ensuring accurate identification of eligible products and exporters poses operational challenges.
• Budget Constraints: The scheme’s sustainability depends on timely and adequate budget allocations by the government.
• Global Compliance: Subsidised credit schemes must align with international trade rules under the World Trade Organization (WTO), requiring careful calibration.

Addressing these issues is crucial for maintaining the scheme’s effectiveness and long-term viability.

Impact on India’s Export Performance

The Interest Equalisation Scheme has played a vital role in stabilising export credit flows and supporting exporters during volatile global conditions. It was particularly instrumental during the COVID-19 pandemic, when access to affordable credit became critical. Sectors such as engineering goods, textiles, and handicrafts witnessed improved export performance due to lower financing costs.
According to RBI data, post-implementation of the scheme, the volume of export credit disbursement increased substantially, indicating enhanced credit availability to exporters. The scheme’s extension during periods of global uncertainty further demonstrates its strategic importance in India’s trade policy framework.

Significance in Economic Policy

The IES complements broader policy measures aimed at boosting exports, such as the Production Linked Incentive (PLI) schemes, Export Credit Insurance Scheme (ECIS), and Remission of Duties and Taxes on Exported Products (RoDTEP). Together, these initiatives enhance India’s competitiveness, diversify its export base, and strengthen external sector resilience.
Furthermore, the scheme aligns with the government’s Atmanirbhar Bharat (Self-Reliant India) initiative by promoting domestic manufacturing and expanding India’s presence in global value chains.