Banks seek higher in­ter­est to con­trol ar­bi­trage by ex­porters

The Pak Banker - - Company& -

NEW DELHI: Banks want an in­crease in the rate of in­ter­est on for­eign cur­rency loans to ex­porters for pack­ag­ing and ex­port to pre­vent in­ter­est rate ar­bi­trage.

The Re­serve Bank of In­dia has capped the rate of in­ter­est on pre-ship­ment credit to en­sure ex­porters get funds at in­ter­na­tion­ally com­pet­i­tive rates.

One banker pointed out that there is a lag of 50-100 days be­fore the ex­porter has to make pay­ment to­wards pre-ship­ment pur­chase. The cheap money bor­rowed is lent out at higher rates, get­ting them a good in­ter­est mar­gin or ar­bi­trage. "Banks have de­manded in­ter­est re­vi­sion to put a stop on this prac­tice," said a se­nior fi­nance min­istry of­fi­cial.

Pre-ship­ment credit is largely made avail­able as pack­ing credit to en­able him to fi­nance pur­chase/im­port of raw ma­te­ri­als, pro­cess­ing and pack­ing of the goods meant for ex­ports. In Fe­bru­ary, RBI had re­duced the in­ter­est rates on such loans by 150 ba­sis points to Li­bor plus 200 ba­sis points.

London In­ter Bank Rate, also known as LI­BOR, is the bench­mark rate for global fi­nan­cial mar­kets. The six month London In­ter Bank Rate on Fri­day was 0.46%.

The is­sue was raised by banks in a re­cent meet­ing with RBI on is­sues re­lated with for­eign cur­rency loans. "Most ex­porters don't take ru­pee loan for pack­ing credit be­cause there is no in­ter­est sub­ven­tion," said a se­nior banker, who at­tended the meet­ing with RBI on for­eign ex­change loans.

Un­der the ex­ist­ing mech­a­nism, an ex­porter can avail a loan fa­cil­ity in most cur­ren­cies in­clud­ing US Dol­lar , Pound Ster­ling, Yen and Euro. "This is a se­cu­rity con­cern, if unau­tho­rised and un­ac­counted for­eign ex­change trans­ac­tions are be­ing done," the fi­nance min­istry of­fi­cial said, point­ing at an­other risk of the ar­bi­trage.

The pack­ing credit loan can be ex­tended for a pe­riod of one year and the credit limit is de­cided on the ba­sis of the ex­porter's per­for­mance and track record. As per RBI guide­lines, banks are re­quired to lend around 12% of their net bank credit to­wards ex­ports.

"Some ex­porters also use these loans as de­riv­a­tive tool," said the bank of­fi­cial, point­ing out that ex­porters are al­lowed to take loan in one cur­rency and place ex­port or­der in an­other cur­rency. "Most banks are not giv­ing pack­ing credit at dol­lar rates, say­ing they do not have enough for­eign cur­rency re­serves. As far as the ru­pee loan is concerned, we have told the govern­ment that banks should not lend at base rate as cheaper loans will help us com­pete in in­ter­na­tional mar­kets, said A Sak­thivel, Pres­i­dent, FIEO. -PB News

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