Easier dollar credit in the offing for exporters
The government will ask the Reserve Bank of India (RBI) to relax rules governing
dollar credit, so that banks can extend loans to cash-starved exporters to tide
over the global recession.
The finance and commerce ministries have decided to ask the central bank to hike
the interest rate ceiling on dollar loans extended by Indian banks to 4% above Libor,
or the London Interbank Offered Rate, the reference rate at which international
banks borrow from each other, according to a commerce department official, who
asked not to be named. The current ceiling on such loans is 1% above Libor.
A hike in the ceiling will facilitate the flow of funds to exporters. As the cost of dollar
funds for Indian banks is between 2% and 2.5% above Libor, it is not viable for them
to lend to exporters within the current rate cap. Though the benchmark three-month
dollar Libor rate has fallen from the October 2008 peak of 4.82% to about 1.2% at
present, banks charge a risk premium on borrowers from emerging markets that
makes the loans much more expensive. India's exports have dipped three months in
a row in the October-December 2008 period due to drying up of orders in the
Western markets and unavailability of adequate credit.
Indeed, in view of the difficult credit conditions in the international market, RBI had
done away with the rate ceilings on external commercial borrowings (ECB) early this
month. Before the relaxation, overseas dollar borrowings for three to five years were
allowed at a maximum of 3% above Libor and over five years at 5% above Libor.
This relaxation will be reviewed this June.
The two ministries will soon meet RBI officials. "Given the credit squeeze in the
country and across the world, it is important that RBI does its bit to enable exporters
to have access to dollar credit. We are going to make a case for allowing banks to
charge exporters Libor+4% on dollar credit so that such loans become viable," the
official said. Incidentally, exporters have already made a case for higher interest rate
limit for dollar loans. In a representation, exporters' body — Fieo — had pointed out
that exporters, particularly the ones in small and medium sectors, were not getting
access to dollar-denominated credit.
Dollar credit is much sought-after by exporters as the rupee, which is presently
depreciating, is likely to appreciate in 3-6 months, Fieo said. Moreover, the cost of
dollar loans is less than that of rupee loans.
With Libor recently averaging about 1.5%, the cost of dollar loans to exporters would
be 5.5% if banks were allowed to charge Libor+4%, the official explained. The
interest charged on rupee loans to exporters is much higher at about 10-10.5%
while for sectors such as textiles, marine and handicrafts that get an interest rate
discount, the applicable rate is around 8%. "We want the RBI to take a quick
decision on the matter as it would go a long way in sorting out the credit crunch
faced by the exporting community," the official said.
Source: The Economic Times
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