CII wants committee headed by PM for exporters

Economy Bureau
Posted: Wednesday, Jan 14, 2009 at 2343 hrs IST
Updated: Wednesday, Jan 14, 2009 at 2343 hrs IST

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New Delhi: Confederation of Indian Industry (CII) on Tuesday called for establishing a committee under the chairmanship of Prime Minister Manmohan Singh to settle over Rs 2,000 crore losses suffered by many small and medium exporters from their transactions in foreign exchange derivatives. These products are used to hedge the risks arising out of currency fluctuations.

CII also released a slew of proposals for reversing the downtrend in exports, including increase in tax refund rates by about 5%, removal of 7% interest rate ceiling on export credit and 2% interest subsidy. This comes a week before a meeting called by commerce and industry minister Kamal Nath on January 21 with export promotion councils and Federation of Indian Export Organisations (FIEO), the apex body for exporters.

Pointing out that exporters—who bought these complex derivative products from financial institutions to hedge their risk during the days of volatility in currency values—had incurred substantial losses when their deals backfired, CII national committee on trade chairman Sanjay Budhia said the PM-led committee should incorporate the views of all the parties involved and resolve the issue on a ‘no profit no loss basis’.

The rupee had appreciating by more than 10% in 2007, and then depreciated by over 20% in 2008. Also, many exporters bought the derivatives without understanding these financial products and landed in losses.

Exporters had bought the foreign currency derivative products when the rupee was strengthening, thinking that it would strengthen further. These contracts allowed them to sell dollars between 39 and 40. But with the rupee weakening to 50 against the dollar, many exporters suffered losses.

The commerce ministry has already proposed that banks and exporters equally share the exporters’ losses from these derivative products. Sources said the commerce and finance ministries are in discussions with banks in this regard.

Banks can either bear a portion of the exporters’ losses and take a small hit on its books or force the exporters to pay up the losses, official sources said.

Many small exporters, if forced to pay up their losses due on derivatives, would go bankrupt as the losses are more than their total networth in some cases, the sources said. This would in turn result in loans to those exporters become NPAs in the banks’ books. If the banks bear a part of the exporters’ losses, when the economy revives, exporters can give banks better returns, a senior government official had said. FIEO had earlier this...

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