BANKS have made a plea to Reserve Bank of India seeking dollar loans for small exporters out of forex reserves.
Indian exporters, who have been badly hit due to the rising rupee, are willing to pay rates over 300 basis points over the London inter-bank offer rate (Libor) - much more than what RBI earns by deploying forex reserves in oveseas securities.
With the US Federal Reserve slashing the Fed Funds rate by 125 basis points over a span of merely ten days, the six-month Libor is currently quoting at 3.01%. This implies that exporters would be shelling out an interest rate of around 6% in offshore markets for dollar loans.
Now, the rate shelled out at 300 bps over and above the Libor works out to be still cheaper than exporters pay for rupee loans taken from commercial banks in India.
Thus, banks and ADs have requested the RBI deputy governor, Shyamala Gopinath in a recent interaction asking if forex reserves available with the central bank can be used to lend dollar loans to exporters.
According to Global Trade Finance’s MD and CEO, Arvind Sonmale, demand for dollar and eurodenominated loans from exporters have seen a massive rise. “We are experiencing a very heavy demand, even as the pricing for these loans have gone up. Sosme exporters are even willing to pay 500 basis points over Libor to get such a loan,” he adds.
GTF, a trade finance body, charges a prime lending rate of 12% for rupee-denominated loans. With the six-month Libor quoting at 3.016%, even at 500-basis points over this, the rates are considerably cheaper than rupee-denominated loans. The excess demand has resulted in a squeeze of foreign-currency funds for banks as well, as they have only two ways of raising these funds — NRE deposits and external commercial borrowings (ECBs). While the NRE deposits are running out, ECBs are difficult to come by because of the aftermath of the subprime crisis.
Bankers feel that if these exporters are lent these loans at 100 basis points over the Libor, it could prove cheaper for them. This could be considered, given that larger corporates do manage to get dollar loans more easily due to their relationships with banks, said a senior banker.
Hinduja Group’s chief financial officer, Prabal Bannerjee said, “if the loans are to be advanced against exports, then it should be allowed. However, it will be primarily towards enhance working capital. However, the central bank had, in its recent policy statement, expressed its reservations about forex dealings for exporters. So, the RBI is bound to be cautious in its approach to such a request, but if it comes through, it will be of great help to exporters.”
Echoing a different view, Mahindra and Mahindra’s general manager, treasury, G Chandrashekhar pointed out that such measures should be used purely as a transitionary measure, for lending a helping hand to smaller exporters.
Whether the country’s forex reserves should be used for such purposes is a totally different argument. From the longer term perspective, the real solution lies in helping them gain alternative inputs and competitiveness through some amount of hand-holding, he added further.