To ease financing constraints faced by Indian exporters, the government is firming up a proposal to expand the resource base of the Export Import Bank of India that provides credit to traders. The idea is to encourage scheduled commercial banks to park a portion of their funds with the Exim Bank, which will then lend these to exporters who are finding it difficult to raise resources for trade financing from SCBs. Besides, the government is also considering providing a special line of credit for the Exim Bank.
These efforts are aimed at generating nearly $10 billion which the bank can deploy for lending to the export sector, officials familiar with the matter said. In the wake of heightened liquidity concerns and increased risk averseness in the financial sector, banks are currently wary of lending directly to exporters as also to many other entities.
?But liquidity is willing to come into a sovereign vehicle,? a senior official said. So a part of the resources freed up through various relaxations on the monetary policy front can be channelised to exporters via sovereign bodies like Exim Bank. This proposal has been discussed by the crisis panel constituted by the Prime Minister Manmohan Singh. Since the Exim Bank is fully owned by the government of India, banks? lending to it stands guaranteed.
?It (the proposal) is still being worked out. Banks want to be sure that their money is safe and Exim Bank can give that guarantee. Pre- and post-shipment credit from Exim Bank can help the exporters, especially those in the SME (small and medium enterprises) category.
Credit in dollars or the foreign currency of their choice also can be given by Exim Bank to these SMEs. When exports are sagging, you need to give these boosters. The government is trying to help through its own agencies like the Exim Bank,? another government official familiar with the deliberations said.
Exim Bank has been mostly raising resources from financial institutions abroad, as it is cheaper than raising funds in the domestic market. However, with the widening of spreads in the overseas markets and a freeze in the credit markets, these windows are now shut. Indeed, an executive at the Exim Bank, asking not to be named, acknowledged that it was now extremely difficult to raise funds from abroad. This has also to an extent reduced the interest rate arbitrage opportunity available for the Bank.
Bankers said that Exim Bank being a sovereign entity can enjoy very competitive rates in case it borrows domestically. ?Banks will welcome this proposal. But we have to wait for the details. If the Exim bank stands as a guarantor, there will be no risk premium involved. This in turn will ensure that lending by banks to Exim Bank will be at competitive prices,? said Indian Bank CMD M S Sundara Rajan.
Another important issue that the government would need to work out is whether these loans to Exim Bank form part of priority sector lending. Banks are keen that such lending is not entirely clubbed under institutional lending.
?What banks will be looking at is whether a portion of the amount that will be given to Exim Bank can be treated as export finance under priority sector lending in the books of the banks. So the cut off amount for that will be important in determining the pricing. There are precedents in housing loans. We lend to customers and also intermediate agencies like housing finance companies,? Rajan said.
The exports contracted by 15% in dollar terms in October for the first time in past 5 years. The government is reviewing its $200 billion export target for this year in the backdrop of the global financial crisis that has led to recession in many countries such as Germany and a sharp slowdown in the major export markets. Commerce and industry minister Kamal Nath has said that government was working on various fiscal and monetary measures for the export sector.
Experts indicate that Exim Bank may need to change rules to provide short term financing to exporters. ?Exim Bank normally gives credit for longer periods, like one year and above, especially for project exports. As per the new proposal, if they are to start giving short-term loans, then they might have to change its rules,? Federation of Indian Export Organisations director general Ajay Sahai said. ?Besides, this arrangement may not be effective as Exim Bank has offices only in 10 cities in India . Exporters in other centres may not be able to access this credit,? Sahai said.
As on March 31, 2008, the Exim Bank had $3.53 billion of foreign currency resources and Rs 18,890 crore of outstanding Rupee borrowings including bonds and commercial papers, as per its annual report 2007-08. Its? paid up capital stood at Rs 1,100 crore as on March 31, 2008, up from Rs 1,000 crore in the previous fiscal year. The bank enjoys an investment grade rating of BBB- from Fitch Ratings as well as Standard & Poor?s, akin to ratings for the country.