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Ceiling rate on export credit reduced

BS Banking Bureau

CREDIT POLICY

The Reserve Bank of India has reduced the ceiling rate on export credit in foreign currency by 25 basis points from London Inter-Bank Offered Rate (Libor) plus one per cent to Libor plus 0.75 per cent in a bid make both the pre-shipment and post-shipment credit internationally competitive for Indian exporters.

The central bank said it is also considering deregulation of the present ceiling on interest rate for domestic currency as it may encourage greater competition among banks and may have the effect of further lowering interest rates for exporters with a good credit record.

"In order to make the interest rate even more competitive in the present low interest rate regime, it is desirable to further lower the ceiling rate on foreign currency loans for Indian exporters by banks," the central bank said in its Monetary and Credit Policy for 2002-03.

Currently, the six-months Libor is ruling at 2.12 per cent while the 12-months Libor is at 2.62 per cent.

According to a senior private sector banker, the Reserve bank of India has, primarily, taken this step to achieve a sort of parity between the cost of funds to an exporter in rupee and foreign currency terms.

The apex bank said that considering this competitive interest rate on foreign currency loans and to mitigate any possible exchange risk, exporters are encouraged to make maximum use of foreign currency loans in one or more currencies of their choice depending on the currency of their export receipts.

"Indian banks, located in areas with concentration of exporters, are being advised to give this important facility due publicity and make it easily accessible to all exporters, including small exporters," it said.

The Reserve Bank of India had, in view of the 9/11 incident, reduced the ceiling on export credit interest rates to 250 basis points below the prime lending rate of commercial banks from 150 basis points below PLR for a period of six months (up to March 31, 2002).

Last month it extended this facility up to September 30, 2002. With this concession, the ceiling rate on pre-shipment rupee export credit up to 180 days works out to 7.5-8.5 per cent for most public sector banks.

As exporters are eligible to sell their export earnings in the forward market, taking into account the forward premia, the effective interest cost to exporters becomes only 2 to 3 per cent, which is internationally competitive.

With effect from the fortnight beginning June 15, 2002, banks will report to RBI, the minimum and maximum lending rates to exporters.

This information will be placed in public domain. This will facilitate exporters in choosing the most competitive rate.

The RBI said that in view of the reduction in interest rates for foreign currency loans to exporters and compulsory reporting of minimum and maximum lending rates charged by banks to exporters, a further proposal which requires consideration is to deregulate the interest rate on export credit in domestic currency.

Linking of domestic interest rates on export credit to prime lending rate has become redundant in the present circumstances, when the effective interest rates are in any case substantially lower than the PLR for exporters.

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