The Reserve Bank of India (RBI) is learnt to have rejected a commerce ministry proposal to use a portion of
its foreign exchange reserves to give long-term loans to the Export Import Bank of India at concessional interest rates.
To boost the financial muscle of Exim Bank so that it can lend to exporters at low interest rates in times of an export contraction, the commerce ministry had taken up the proposal with both the finance ministry and the RBI, sources told FE. It had even suggested that the government stand as guarantor for the funds to be made available to Exim Bank should the central bank endorse it, one of the sources said. Even the Economic Survey for 2015-16 had called for the redeployment of the capital at RBI’s disposal for recapitalising the state-run banks, which was promptly dismissed by its governor Raghuram Rajan.
The ministry was also of the view that the RBI should offer the funds to Exim Bank at the same rate at which the central bank deploys its reserves, especially in US securities. India’s foreign exchange reserves stood at $361.99 billion as of May 13, just short of an all-time high of $363.12 billion reported in the previous week, according to RBI data. The reserves are enough to cover 10 months of imports.
Already, high borrowing costs are hurting exporters while a poor capital base and lending limits of the Exim Bank have severely undermined its abilities to finance large projects overseas, a core mandate of the bank. Earlier, Exim Bank officials had lost out on opportunities to finance some projects, including a Larsen & Toubro-led consortium’s bid for a $1.5-billion metro contract in Saudi Arabia and a $600-million road contract in Doha by L&T.
The RBI allows the Exim Bank to lend only 10 times of its net-owned funds (Tier-I capital, or core-equity capital) within a year, while China’s Exim Bank has a leverage ratio of 77.5 times. The bank’s net-owned funds were to the tune of R6,359 crore as of March 31. China’s Exim Bank is believed to have lent $300 billion, far higher than that by its Indian counterpart. Consequently, Exim Bank of India is unable to compete with the Chinese in financing projects abroad.
Moreover, according to the Federation of Indian Export Organisations, the rate of export credit is just 2-3% in the euro zone, 5.5% in China, 2.6% in Taiwan and 6.2% in Malaysia, while in India it’s as high as 11-12%.
Stating that the RBI is next only to Norway’s central bank in holding a high portion of equity (capital, retained earnings and contingencies) with itself — around Rs 8 lakh crore now including unrealised gains — the Economic Survey had said even if the RBI were to trim the equity-asset ratio to 16% (the median of a representative sample of central banks), considerable sums could be released to public sector banks (PSBs), reducing the recapitalisation burden on the exchequer. It added that the RBI has a high shareholder equity-asset ratio of 32%.
However, Rajan dismissed the suggestion, saying: “Whoever wrote that piece does not understand monetary policy economics or the monetary balance sheet of banks.” Rajan explained that if the RBI gives extra money to the government, it will basically reduce the central bank’s ability to buy government bonds directly.
As such, the government is struggling to fulfil the promise of providing fresh capital to the tune of Rs 70,000 crore to PSBs between FY16 and FY19. PSBs were to raise another Rs 1.1 lakh crore from the market, a difficult option given the piling up of bad debt.