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%).

Export credit constituted 6.4% of the total credit in 2007-08. Of this, 20% was in foreign currency and 80% in rupee credit, according to Federation of Indian Export Organisation. The tilt in favour of rupee credit was also due to the interest subvention scheme—under which government shared a portion of the total interest outgo of the exporters’ loan—which expired recently. The crisis panel headed by the prime minister has held its emergency meeting on Monday after the exports growth nosedived into the negative territory at (-) 15% in September for the first time in five years. The panel is examining ways to revive exports and to eliminate financing constraints faced by the exporters.

The government is also considering setting up a special window for buyer’s credit rollovers in foreign currencies that are appreciating, like Yen and US dollar. This is to help importers who have taken buyer’s credit in those currencies in order to import capital goods and want to roll it over on maturity.

At present, banks are unwilling to allow this, as it will result in losses for them due to the spike in appreciation of such currencies. The proposal for hiking the rate of interest under the PCFC scheme is to make it more attractive to banks to lend to exporters. On Tuesday, the three-month Libor for dollars fell to the lowest level in over four years to 2.24%. “Even if the interest rate is increased by 1.5-2%, it will be around 4.25%, and at this rate too Indian exports can remain competitive. But it important that banks lend them this much-needed credit,” an official said. Industry sources said banks like Canara Bank have totally stopped giving fresh credit under the PCFC scheme.

Currently, banks also include additional service charges as well as management fees along with the foreign currency credit. The government is also expected to persuade banks to accord a higher priority to exporters regarding foreign currency credit than to other corporates.

“Banks can advance loans in foreign currency only if they have foreign currency reserves. Earlier the banks could raise foreign currency short-term lines of credit from international sources to lend to exporters under the PCFC scheme. But with the global financial crisis, banks are unable to get adequate foreign currency anymore,” a source in the banking industry said.

•The move follows high volatility in foreign currency values against the Rupee resulting in exporters’ plans going haywire

•The rupee posted its biggest single-day fall in more than 12 years on Wednesday, closing at 49.30/32 per dollar