Tuesday, April 12, 2016

Use forex reserves to lower exporters’ credit costs: Commerce Min

The commerce ministry wants the RBI to use a part of forex reserves to give long-term loans at low interest rate to the Exim Bank of India, which then can on-lend to exporters at lower rates than bank credit. The aim is to help reduce the costs and enhance the competitiveness of exporters at a time of global trade slowdown and weak demand overseas, the ministry has said.

A senior government official, wishing not to be identified, said the RBI had initially rejected this proposal. But the commerce ministry then took it up with the finance ministry, which in turn is in discussions with the RBI on the issue, the official said.

According to the commerce ministry, a part of India's foreign exchange (forex) reserve can be used for this purpose as the forex reserve has now increased to a record high of around $360 billion. This level of forex reserve is enough to fund imports of over 10 months, also partly because of a shrinking import bill, the ministry said. Higher import cover indicates greater currency stability and India's capacity to absorb external shocks (such as the impact of an outflow of funds following a rate hike by the US Fed) and support its domestic economy.

Rate of export credit in India is 11-12 per cent as against 2-3 per cent in the euro area (except Greece), 2.6 per cent in Taiwan, 4.6 per cent in Thailand, 5.5 per cent in China and 6.2 per cent in Malaysia, according to a study by exporters' body FIEO. Exporters, citing the contraction in the country's goods exports for 15 months since December 2014, have been demanding credit at lower rates to help increase their competitiveness in global markets. However, the RBI, the sources said, feels that the actual cost of credit for Indian companies is lower than what is cited as their source of funds includes external borrowings at lesser rates.

Exim Bank of India has been citing constraints including that it is permitted a low leverage ratio (of around 11 times the bank's net-owned funds – or NOF) in comparison to that of its Chinese counterpart, where the ratio is 77 times. Exim Bank has sought relaxation of norms including a higher leverage ratio (of at least 15 times its NOF) and more capital from the government.

Sources said the RBI was reluctant to permit a higher leverage ratio for the Exim Bank. Also, the finance ministry was unwilling to give more capital to the Exim Bank given the fiscal constraints. The Exim Bank, the commerce ministry said, was therefore finding it difficult to finance project exports due to these operational limitations. The commerce ministry had also supported a proposal of categorising the entire export credit given by all lenders separately under priority sector lending without much riders to help bring down the cost of credit for exporters. (ENDS)

Source → Use forex reserves to lower exporters� credit costs: Commerce Min

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