Exchange rate issues in export

To curb volatility in the foreign exchange market, the Reserve Bank of India (RBI) had on Monday raised the short-term rates for additional borrowing by banks, capped the latter's regular borrowing amounts and, on Thursday, conducted limited open market operations. The worry now is that bankers would be more selective in release of credit and borrowings might also get costlier. Exporters, especially the small ones, could be affected adversely.

Even before RBI took the stringent measures, Rafeeque Ahmed, president, Federation of Indian Exporters Organisations (FIEO), complained that the exchange rate's volatility has added to the woes of exporters. Banks are asking exporters which have availed pre-shipment and post-shipment credit in foreign currency to reduce the exposure, due to the currency depreciation, by remitting funds or appropriating the export proceeds to that extent.

Such a move by banks would deprive exporters of funds and add to the liquidity problem at their end, he said.

FIEO says the genesis of the problem lies in the practice followed by banks, which at the time of disbursal of export credit in foreign currency, for controlling purposes normally apply the notional exchange rate fixed at the last day of every month.

Under the system of revaluation of foreign currency at every month to ascertain the rupee liability of individual customers, the notional rate is again applied. If this rate is higher, banks contend the exporter has breached the rupee liability (available drawing power as on the date of loan minus revalued rupee liability on the last day of the month).

Ahmed said the procedure needs to be looked into by RBI. He demanded the exchange rate fixed by the bank at the time of granting the loan should continue till the currency of the loan, irrespective of the currency movement at the time of repayment.

Leaving aside the merits of what FIEO says, access to trade finance seems a global issue. At a panel session examining the issue at the World Trade Organisation's Annual Aid-for-Trade Review, when asked to name the most severe obstacles to growth, panellists pointed to financing constraints as one of the most severe barriers to trade.

Several argued there was considerable evidence to support the contention that small and medium enterprises face a number of obstacles and there were problems in accessing finance, mainly related to their limited resources and perceived risk by lenders.

A recent Asian Development Bank study indicates the total value of trade finance requests received in 2011 by commercial banks, responding to a survey, amounted to $4.6 trillion. Of this, a little more than $1.6 trillion was rejected, suggesting a global, unmet demand (or gap) of $1.6 trillion (of which $425 bn in unmet demand was in developing Asia).

A similar survey in India on whether banks meet the demand for credit from exporters and small and medium enterprises can reveal whether there is any unmet gap in financing genuine needs.

A survey on the extent to which the RBI instructions to facilitate export credit have percolated to the operating levels in banks will also help formulate suitable strategies.

For now, exporters can only factor in the increased risk aversion of bankers and carry on.

Email: tncr@sify.com