Banks are sensing warning signals of potential loan defaults from gems and jewellery exporters as the appreciating rupee continues to dent their profits.
Loan accounts of a few diamond and jewellery exporters are already showing signs of stress, with banks receiving delayed payments.
Banks have decided to go slow in disbursing new loans to exporters and to pre-empt any default, lenders are liberally considering extending the repayment period for existing loans.
"Right now, we only see some kind of stress in one or two diamond units and a few jewellery units also. We are beginning to see that," said O P Bhatt, chairman of State bank of India (SBI) at an analysts' meet after the bank's 2007-08 second quarter results.
The rupee has appreciated 13 per cent against the dollar since January, rising 10 per cent since April alone, affecting the profit margins of exporters.
"If for an order of Rs 100, the bank has given a loan of Rs 90, with the rupee appreciating 13 per cent, the order itself in rupee receivables is Rs 87. There is a gap then (in servicing the principal amount itself)," said a Tirupur-based garment exporter, trying to explain the impact of the rupee appreciation.
A senior official of a Chennai-based public sector bank, which has a large exposure to textile and garment exporters, said, "We are cautious on fresh exposure to this segment. Fresh financing will not be there at the present margin. We may restructure term loans or go for a longer-term repayment programme on a case-to-case basis. There will not be large-scale defaults, but profitability is under pressure."
Exports constitute nearly 41 per cent of the textile sector's turnover at around $15.20 billion. The profit margins of textile and garment exporters range between 5 and 10 per cent.
"It is possible that some of the units that we have financed may do badly. It is already happening in the case of exporters, particularly textile and garment. It is happening in a few other sectors. If the situation continues to be the way it is or it worsens, it (defaults) might happen ... because the dynamics of the economy are changing," Bhatt said in response to a question at the meet.
The government is providing a 2 per cent interest subsidy to banks to extend export credit to certain sectors including textiles, at rates not more than 4.5 percentage points below their benchmark prime lending rates (PLRs). Earlier, banks were lending at a maximum rate of 2.5 percentage points below their PLRs.
"We are cautious on new loans. Even if we lend, we would lend at the maximum permissible rate," said the treasury head of a large Mumbai-based public sector bank.
The demand for loans has also fallen with companies postponing their expansion plans and a near 40 per cent drop in new orders.
The Gems and Jewellery Export Promotion Council (GJEPC) has approached the government to extend the interest relief to the $17 billion gem and jewellery export industry. The gross profit margins for this industry are at 6-10 per cent.
"For every $100, we pay $70 for imports, but the balance is for labour and other charges and profit. Since the rupee has risen so much, our inventory stock that we paid for at a rupee value of 43-45 against the dollar, we have taken a 20 per cent loss. This year, these units may not be able to post any profit," said Vasant Mehta, vice-chairman, GJEPC.
The profitability of not only small and medium enterprises (SMEs), but also larger players is under pressure.
T S Narayanasami, chairman and managing director, Bank of India, said, "The rupee appreciation is a big threat for all corporates, which are in a big way in exports. So far we have not seen, it has not come to the surface, but for bigger exporters it will have an impact."
While bigger exporters can hedge a part of their dollar exposure, entering into derivative contracts with banks puts a further squeeze on margins for small exporters. Banks charge up to 1 per cent as fee for hedging the dollar exposure.
"The percentage of commission has also increased from earlier applicable rates. When margins are low, hedging works only for big exporters," said the Tirupur-based exporter.
