Interest rate ceilings on foreign currency loans may be hiked to meet exporters’ credit crunch

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New Delhi, Nov 12: The Centre is considering a proposal to increase the interest rate ceilings on foreign currency credit to exporters and ensure that banks provide more loans to exporters in the foreign currency of their choice. The move follows high volatility in foreign currency values against the Rupee resulting in exporters’ plans going haywire, resulting in increased demand for foreign currency credit by exporters. A final decision in this regard will form part of the relief package for exporters, official sources said.

The rupee posted its biggest single-day fall in more than 12 years on Wednesday, closing at 49.30/32 per dollar, 2.4% weaker than Tuesday’s close of 48.1250/1400.

According to exporters, banks are unwilling to extend them credit in dollars or foreign currency of their choice despite directions of the Reserve Bank of India (RBI) under the pre- and post-shipment credit in foreign currency (PCFC) scheme.

This is adding to the woes of exporters who are not only battling demand slowdown in global markets but also lesser financing options domestically. “No banks want to take any chances. So whether is the letter of credit or any other form of trade financing, banks are pulling out,” a senior executive at a public sector bank said asking not to be named.

Banks lend to exporters at London Inter Bank Offered Rate of LIBOR plus a maximum of 100 basis points under PCFC. However, with the credit freeze in the global markets and rapid rise in spreads above LIBOR, this 100 basis points ceiling is turning out to be too small. Industry sources said this ceiling needed to be enhanced by at least 250 basis points if lending by banks is to pick up.

While some banks are genuinely facing a dollar shortage, others are reluctant to extend dollar financing to exporters as they get better returns for their dollars from big companies, industry sources said. Of the total exports, around 60% happens in US dollars, while 15% is in Euros. The other important currencies are Yen (1-2%), Pound Sterling (3%) and Deutsche Mark (4%).