Exports were growing. The banker was pleased that the limits were hardly used. And every month, the project EMI left the current account, and the export business quietly paid what the project could not.
Exports were growing. The banker was pleased that the limits were hardly used. And every month, the project EMI left the current account, and the export business quietly paid what the project could not.
That was the picture at the first exporter in this series.
₹44 crore of post-shipment working capital is funded with owners’ money, while the project runs on term loans at 9%.
Post-shipment credit costs 5.25% after subvention (8% less 2.75%). Let the bank fund ₹36 crore, the amount the subvention cap covers, and use that cash to repay term loans. The group saves ₹2.8–3.5 crore a year, including the forward premium on its euro bills.
The situation
The group has two companies, each with its own IEC and GST registration. Together they sell about ₹135 crore a year, mostly exports in euros, all on 120-day credit.
A few years ago the group invested about ₹100 crore in a new project, ₹80 crore of it from banks. About ₹53 crore is still outstanding. The EMI is about ₹1.66 crore a month. The project brings in about ₹1 crore a month.
That leaves a gap of ₹66 lakh every month, which the export business pays.
At the same time, about ₹28 crore of sanctioned export credit limits were completely unused. The group was financing its entire export cycle from its own pocket.
How it happens
It starts with success. Exports do well and cash builds up. The owners use it to buy raw material and to carry buyers for 120 days. Not drawing on bank limits feels prudent.
By the time the project comes along, the cash is already inside the export cycle:
- Stock of ₹25–30 crore. After supplier credit, that is a pre-shipment need of about ₹11 crore per company, or ₹22 crore for the group.
- Post-shipment working capital: annual turnover × credit days ÷ 365 = ₹135 crore × 120 ÷ 365 = about ₹44 crore.
So the project goes to the bank as a term loan. That creates two mismatches.
Price. Export credit is the cheapest rupee borrowing an exporter can get. Eligible MSME exporters get interest subvention of 2.75%, a government subsidy on export credit, capped at ₹50 lakh a year per IEC. Two companies with two IECs can claim up to ₹1 crore a year. A term loan gets no such help.
On top of that, when a euro bill is discounted in rupees, the forward rate for the bill’s due date is applied, by the bank or through the exporter’s own forward contract. At today’s euro premium of 4–6% a year, that premium can pay for most or all of the discounting interest. We explained this mechanism in Post-Shipment Credit Is Now a Zero-Interest Game.
Speed. Export credit revolves: each bill is repaid from its own proceeds. A term loan must be repaid every month, whether the asset has started paying or not. Here the project loans were due to be repaid within about four years, on assets built to last much longer. The project could pay its interest comfortably. It could not pay its repayment speed.
So the owners’ cash was doing a job the bank would do almost free. And the bank’s costliest money was doing a job the owners’ cash should have done.
The numbers
Take only one step: discount the export bills with the bank and use the released cash to repay the costliest term loans first.
| Step | Simple calculation | ₹ crore |
|---|---|---|
| Post-shipment working capital | Turnover × credit days ÷ 365 = 135 × 120 ÷ 365 | 44 |
| Credit covered by subvention cap | ₹1 crore (₹50 lakh × 2 IECs) ÷ 2.75% | 36 |
| Owners’ cash released to repay term loan | Bank funds this amount | 36 |
| Term loan interest saved a year | 36 × 9% | 3.24 |
| Post-shipment interest a year | 36 × 8% | 2.88 |
| Less subvention | 36 × 2.75% | (0.99) |
| Net cost of post-shipment credit | 2.88 − 0.99 (5.25%) | 1.89 |
| Interest saving a year | 3.24 − 1.89, or 36 × (9% − 5.25%) | 1.35 |
Now add the forward premium on the ₹36 crore of discounted euro bills:
| Forward premium a year | Premium earned | Total saving a year | Per month |
|---|---|---|---|
| 4% | 36 × 4% = ₹1.44 cr | 1.35 + 1.44 = ₹2.79 cr | ₹23 lakh |
| 5% | 36 × 5% = ₹1.80 cr | 1.35 + 1.80 = ₹3.15 cr | ₹26 lakh |
| 6% | 36 × 6% = ₹2.16 cr | 1.35 + 2.16 = ₹3.51 cr | ₹29 lakh |
That closes about 35–45% of the ₹66 lakh monthly gap, without the group borrowing a rupee more in total. Debt moves from a fixed-repayment term loan to a revolving export facility that repays itself from each shipment.
Three honest caveats
Most of the interest saving comes from the subvention. Without it, the gap is only 9% − 8% = 1%, and the saving falls to 36 × 1% = ₹36 lakh a year.
The premium is a new gain only if the bills are unhedged today. If you already book forwards on own-funded bills, you earn the premium now, and your gain is the ₹1.35 crore.
Limits must go up. ₹28 crore is sanctioned against ₹36 crore needed. An enhancement has to be agreed before the release.
The rule
Long-life assets on long loans. The operating cycle on export credit. Own funds as margin and as your share of the project, never as a substitute for the cheapest credit you are entitled to.
Export credit must be used for exports. Under the RBI Master Circular on Rupee / Foreign Currency Export Credit, packing credit funds the purchase, processing and packing of export goods and is liquidated from export proceeds. You cannot draw export credit and pay it into a term loan. What you can do is stop funding exports from your own cash. The cash that frees up is yours, and that is what repays the costly loan.
What to do
1. Measure your post-shipment working capital
Annual turnover × credit days ÷ 365. Compare it with your post-shipment credit actually used.
2. List your term loans
Rate, months left and prepayment charge for each. Get prepayment terms from your bank in writing.
3. Count your subvention
₹50 lakh per IEC a year. Check how much has been credited this year and how much credit that cap can still cover.
4. Check the rate on your bills
Ask what forward rate was applied to each discounted bill, and whether the premium is reaching you.
5. Release in stages
Agree the limit enhancement first. Discount new bills over two or three months, and prepay the costliest loan first, keeping the end date so the EMI falls.
Check your own books
- What was your average use of export credit limits over the last 12 months?
- How many crores of export bills are outstanding today, and how much of that is funded by the bank?
- What is the highest rate on any of your term loans?
- Does each project pay its own EMI, or does the export business cover the gap?
- How much subvention has been credited against each of your IECs this financial year?
If your limits are mostly idle and your highest term-loan rate is above 8%, this case is probably about you too.
General education, not advice for a specific company. Case figures are rounded and anonymised. Subvention rules, interest rates and forward premiums change; the premium range reflects October 2026 and may have moved. Confirm the current position with your bank and CA before acting.
Next in Audit Notes
A different industry, and a line-by-line review of what one exporter’s banks charged it in a year.
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Sajan ST · FX Capital India, Treasury Advisory · sajanst@fxcapitalindia.in · 8714225154
Audit Notes is a series of case studies based on treasury audits carried out by FX Capital India across different industries.