Credit- MSMEs- Exports

Credit requirement of export firms

• Share of export credit- down- Concern for MSMEs
• Enhancing credit channels- Investment decisions
• Exporter problems- delayed payments, defaults, lack of credit insurance.
• Loans to exporters fell- Priority list grew 9.4%
• India- $5 trillion economy- $1trillion exports needed
• Growth rate 8% and export growth even higher
• Example- China
• Present level of export credit- not enough for target
• Export credit- sub target, Export Promotion Funds.
Analysis of India’s aggregate exports

• Indian exports- technologically advanced services sector, relatively

lagging manufacturing sector
• Exports- growth and transformation
• Significant fluctuations in growth rate- exports
• Annual aggregate exports- rise since mid 1980s witnessing a fall only
in 2014-15 and 2015-16- Recovery
• India export performance modest compared to other Asian countries
• Petroleum products- Top earner of foreign exchange, share of
Electrical goods and Machinery rising, Traditional good share- falling
• Export growth in labour intensive sectors- low, most affected
Analysis of recent trade policies
• Foreign trade policy (2015-20) – increasing exports, generating
employment, improving ease of doing business
• Export share- from 2 to 3.5% and doubling India’s exports in goods and
services from $465 billion to $900 billion
• Introduced 2 new schemes- MEIS (Merchandise Exports from India
Scheme) and SEIS (Services Exports from India Scheme)  replacing
multiple schemes earlier in place, each with different conditions for
eligibility and usage.
• Measures have been adopted to nudge the procurement of capital goods
from indigenous manufacturers under the EPCG scheme by reducing
specific export obligation to 75% of the normal export obligation.
• Benefits from the schemes (MEIS and SEIS) have been extended to
units located in SEZs.
• Fast track clearance facility, Permitting of technology sharing facilities,
inter unit transfer of goods and services and to set up warehouses
near ports and use duty free equipment for training purposes.
• For focused interventions to boost exports- MSME Clusters - based
on the export potential of the product.
LITERATURE REVIEW
Modligliani & Miller-
• 1958- No effect of leverage
• 1963- Firm’s value will increase with financial leverage and this increasing amount
will be the tax shield.
Myers & Majluff-
• Hierarchy of firm preferences
• Firms prioritize their sources of funding starting from retained earnings to debt
issuance and finally equity as a last resort to meet their funding needs.
Pecking order hypothesis-
• Profitable firms were found to be less likely to depend on debt than less profitable 
ones, in their capital structure
• Relation between leverage and firm performance.
• 2 categories:
• Firstly, Information asymmetry & signalling-
• Superior information– information asymmetry– not pricing a loan according to
borrower quality– imperfect pricing & credit rationing (Stiglitz & Weiss (1981))
• Debt servicing cost represent a costly outcome for borrowers-- to communicate
their quality, good borrowers can use debt as a signal.
• Debt becomes a credible signal of the quality of firms and “good quality” firms
are generally more inclined to issue debt.(Ross(1977)) suggest a positive
relationship between leverage and corporate performance. 
• Secondly, Agency costs
• Agency cost can arise from conflicts of interest between categories of agents-
Jensen and Meckling (1976)
• They identify 2 types of conflict- one between shareholders and managers and
the other one between shareholders and debtholders.
• Shareholders and Managers– Debt financing raises the pressure of managers to
perform as they tend to avoid the personal cost of bankruptcy.-  Grossman and
Hart (1982) -- so positive relation between leverage and performance
• Shareholders and Debtholders- Shareholders might want to invest in riskier
projects with higher returns. But in case of investment failure, losses are shared
by both.  This conflict of interest can also create underinvestment
(Myers(1977)).
• Agency cost as a result of shareholder- debtholder conflict suggest a negative
relationship between capital structure and performance.
• Empirical studies-- studies differed on the basis of their definition for
performance– most of them adopted an accounting measure of
performance- return on net worth to evaluate performance
•  Kinsman and Newman (1999)  found the existence of robust
relationships between leverage and some of the measures of
performance like a negative link with firm value and cash flow.
• Taub (1975) found significant positive association between four
measures of profitability and debt ratio. Petersen and Rajan (1994)
identified the same relation, but for industries. Nerlove (1968) and
Baker (1973) share similar results for industries. Champion (1999)
suggested that the use of leverage is one good way to improve the
financial performance of the firm.
• Some works discuss the determinants of leverage and test the profitability variable.
• Titman and Wessels (1988) discuss different determinants that influence the firm’s
debt-equity choice and identify their relationship with optimal capital structure. They
find some evidence suggesting a negative relation between capital structure and
performance for the US firms.
• Kester (1986) found a negative relation between capital structure and performance for
the US and Japan. Similar results were documented by Friend and Lang(1988), Rajan
and Zingales (1995) for G-7 countries and Wald (1999) for the developed countries.  
• Pathak (2011) investigated the relationship between leverage and performance of
Indian manufacturing firms for the period of 2001- 2007 and found that the level of
debt has significant negative association with firm performance. Their results do not
align with the findings of some studies done for western economies but are consistent
with most studies done for Asian countries. The high cost of borrowing in developing
countries like India in comparison to western countries can explain this conflict in
results.
• Few studies have explored the capital structure- performance nexus with
reference to export firms.
• Vithessonthi & Tongurai (2015) find a negative relation for non-exporting
firms and a positive relation for exporting firms-- since exporting firms
benefit from internationalization, exporting firms tend to perform better
than non-exporting firms
• Kuzmina & Volchkova (2016) show that exporting leads firms to increase
debt financing, using a panel dataset of Russian firms for the 2006-11
period.
• To conclude, there is no consensus on the relationship between capital
structure and firm performance and the empirical evidence on the link
leverage- performance is mixed.