Banks seek higher interest to control arbitrage by exporters
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