A Reserve Bank of India group has suggested deregulation of ceiling on interest rate charged on pre-shipment credit in foreign currency to facilitate better availability of funds.
The group's report has also recommended the use of foreign currency non-resident (bank) -- FCNR(B) -- deposits for the purpose.
If complete deregulation is not considered feasible, the interest rate ceiling may be raised by 50 basis points to London inter bank offered rate plus 125 basis points to ensure greater availability of export credit in foreign currency.
This will help banks with a high concentration of external funds (especially FCNR(B) deposits), to provide foreign currency loans to exporters/ importers.
Banks are now allowed to extend PSCFC and export bill rediscounting (EBR) facilities to exporters from the foreign currency balances available in exchange earners foreign currency, resident foreign currency domestic and FCNR(B) accounts, under escrow accounts and also by availing lines of credit from abroad and from banks in India.
Though the present interest rate ceiling of Libor plus 75 basis points on export credit in foreign currency is intended to help small exporters, banks are finding it difficult to lend on these rates as these small advances have high transaction costs, said the report.
Many banks are reported to have levied additional service charges to cover their transaction costs on these advances, it added.
The report is of the view that the basic issue in export credit in foreign currency is that of pricing rather than availability of foreign currency.
It was felt that since banks are permitted to access overseas lines of credit without limit for the purpose of on-lending to exporters, any removal of the interest rate cap will lead to a quantum jump in PSCFC as well as in overseas borrowings by banks as this will give them an attractive spread.
FCNR(B) funds provide an important source for foreign currency loans including export credit.
The share of finance of PSCFC and EBR through funds from major foreign currency deposits of banks (FCNR-B, EEFC, RFC, etc.) was below 4 per cent of these deposits during March 1998 through September 2002.