Indian exporters have raised at least half-a-dozen concerns over the revision in Foreign Exchange Management Act (FEMA) rules that come into effect later this year, with the Reserve Bank of India (RBI) considering several of the proposals favourably, according to industry executives. RBI Governor Sanjay Malhotra met industry bodies on Thursday to discuss the issues.
Priority Sector Export Credit Decline
The Federation of Indian Export Organisations (FIEO) flagged that priority sector export credit fell by 14% by February 2026, despite goods and services exports rising 4% during the same period. FIEO and other industry bodies have raised credit flow as a major concern, particularly due to liquidity issues, but banks have not responded positively. Exporters are demanding that RBI push for timely pre- and post-shipment credit at competitive rates, along with better transmission of interest equalisation benefits.
Letter of Credit and Advance Payment Provisions
One of the key concerns relates to a FEMA provision mandating that exporters may undertake exports only against receipt of full advance payment or an irrevocable Letter of Credit (LC) if their export proceeds remain unrealised for more than one year from the due date of realisation or the extended period. Export bodies argued that this rule would hurt exporters dealing with multiple buyers. Instead, they proposed that the restriction should be specifically linked to the defaulting buyer and not applied across all buyers. Industry players said that RBI has responded positively to this suggestion.
Merchanting Trade and EDPMS Challenges
Exporters also called for aligning merchanting trade transactions related to 'restricted or prohibited exports' that do not touch Indian shores and involve other countries. Additionally, exporters said they face challenges regularising trade data on the Export Data Processing and Monitoring System (EDPMS) platforms that face sanctions, as banks decline to process these bills due to commercial risks, leaving unregularised shipping bills outstanding. They have called for a review of these procedures.
Implications for Trade Finance
These developments are significant for trade finance professionals, corporate treasury teams, and export finance managers. The proposed restriction linking unrealised export proceeds to mandatory LC or advance payment could alter how banks structure trade finance facilities for exporters with overdue receivables. The decline in priority sector export credit highlights a growing liquidity gap that may require alternative financing instruments, such as supply chain finance or export credit agency guarantees. The RBI's favourable reception to linking restrictions to defaulting buyers rather than all buyers may ease compliance for exporters with large portfolios. The ongoing issues with EDPMS and merchanting trade underscore the need for digital trade finance platforms that can handle sanctions screening and regulatory reporting efficiently.
Sources:
