Banks refuse dollar loans to exporters as cost rises
3 Dec, 2007, 0115 hrs IST,Nidhi Sharma, TNN


MUMBAI: Banks have stopped giving dollar loans to exporters. According to banking industry officials, they can no longer afford to offer dollar loans as their own foreign currency credit lines have dried up.

Indian banks have been drawing foreign currency credit lines from international banks to lend to local exporters. Now, with the subprime fiasco severely impacting the global money market, high-street banks in the US and Europe, even reluctant to lend each other in the term money market, are in no mood to extend credit lines to Indian banks.

And even if they do, it will be at a price that is higher than what local banks can charge exporters. Under the RBI norms, banks can charge a maximum of London inter-bank offered rate (Libor), plus one percentage points for dollar loans, commonly called packing credit in foreign currency (PCFC).

“Liquidity has become so tight that we would be losing money if we give PCFC loans to exporters,” says the head of trade finance of a private bank.

Exporters use PCFC loans to process goods as well import raw materials. Since the interest on such foreign currency loans are significantly lower than rupee loans, PCFC helps them to save on cost.

Particularly at a time when the rupee is appreciating against the dollar. “Credit denominated in rupee means paying higher transaction cost, and this can be more than 50% of the interest rate currently paid under PCFC,” says All India Rubber Industries Association (AIRIA) president M F Vohra.

Rajesh Exports chairman Rajesh Mehta says his firm is also facing a problem with regard to dollar loans. Banks don’t have dollars and are increasingly asking borrowers to take rupee loans.

“We deal with eight to nine banks. The problem is more acute in smaller banks,” says Mr Mehta. If at all banks give dollar loans they are demanding a kind of service charge which is over and above the interest ceiling. This is against RBI norms.

Mr Vohra says exporters plan to raise the issue with the Directorate General of Foreign Trade (DGFT). If an exporter is bringing the proceeds in dollar, then credit should be made available in dollars.

He feels that nationalised banks should find a way to give foreign currency loans to exporters, who have already taken a huge blow on their margins because of the appreciating rupee. Non-availability of cheap dollar loans will only add to the exporters’ blues.

lower spending/lower investment/higher savings scenario ... IIF looks like a solid short...

Actually, this makes USD more rare due to a lower velocity. They are not being re-lent.

That puts the "value" up relative to other currencies.

no doubt...but IIF is an equity index

If exporters need to borrow money to export and they can't get it, it
follows that the exporters cannot export and there will be less
foreign (India-made) goods in the stores. It also means India exporters
go out of business.

Is this true or false?

Mike

Omm:

They can borrow in another currency and swap to USD or do an FX trx to get USD. The issue was that it was really cheap for them to borrow in USD and that window is closing.

They don't go out of business. Their costs rise through thefinancial side. They can still borrow in local currency, as always.

the cliff-dive in the rupee has really helped out...but im just generally bearish on the emerging markets...almost all of them are facing high headline inflation and their dependence on weak domestic currencies is tremendous...this is a bad combination should the self-feeding mechanism "stall", which is extremely likely.

Thanks Nawal. This would certainly help explain the rapid decline in industrial growth rates in India since the summer.