Availability brings back short-term dollar credit

The availability of greenback in the overseas market seems to be easing at least for the short-term credit after May-June 2008.

Indian banks are witnessing a spurt in rollovers in buyer’s credit, a form of short-term trade finance facility. Bankers said, this facility had totally stopped since the global markets hit the liquidity crisis last year.

“Even if the Reserve Bank of India raised interest rate ceilings on buyers’ credit, no bank could afford to provide short-term credit as dollar was not easily available,” said a banker.

Now things have started changing. In the last two months, Indian companies have been rolling over buyers’ credit facilities, which in simple term means that they are utilising this financing facility. This facility, though available earlier, went largely unused due to non-availability of the greenback.

The dollar was even available at a cheaper rate for domestic credit needs, said bankers. Explaining this, a banker said, an importer could now get buyer’s credit at 125-150 basis points over the London Inter-bank Offered rate (Libor- currently at 0.91 per cent for six months).

While a company pays 2.50 per cent to a maximum of 3 per cent for getting buyers’ credit (including transaction cost), domestic credit for six months is available at not less than 6 per cent, that too for the top notch and triple-A rated companies. Thus there is a pure interest rate advantage of 2-3 per cent between foreign currency credit and domestic credit.

In the bond market, a six-month commercial paper (CP) was available for not less than 3.5 per cent compared to a month back, said a dealer. He added that now CP rates have gone above 4 per cent following the demand for funding initial public offerings (IPOs). Non-convertible debentures come with a daily call and put option and, hence, funds could be called back any time, he further stated.

Buyers’ credit has come handy since the foreign operations of Indian banks could borrow from overseas interbank overnight markets at 0.25-0.5 per cent to fund their balance sheets in case there was some delay in repaying the money. Earlier during the crisis, the dollar was not available, and even when available, credit aversion prevented lenders from parting with money.

Under buyers’ credit, an importer requests his bank to open a letter of credit (LC). The importer then requests the LC-opening bank to pay dues on behalf of the importer. Thus this is a form of credit facility given to the importer. The importer reimburses the bank when he gets receivable from the transaction.

LCs are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary, who is to receive the money, the issuing bank to whom the applicant is a client, and the advising bank to whom the beneficiary is a client. Almost all LCs are irrevocable, and cannot be amended or cancelled without prior approvals from the beneficiary, the issuing bank and the confirming bank, if any.