Banks must link import credit period to operating cycle: RBI

Bankers say the directive from RBI is a step to rationalise credit usage pattern

As a step to curb building up risks from short-term credit, Reserve Bank of India on Thursday asked banks to link trade loans for imports to the operating cycle and trade transaction.

Bankers said the directive from RBI was step to rationalise credit usage pattern. With cheap rates for trade credit, there was tendency to borrow for period more than what operating cycle of a unit required. For example, if the operating cycle of units (importing goods and materials) was three months, it sought trade credit for six months to enjoy use of cheap funds in foreign currency. If the position was un-hedged it would expose units to currency risks in

A top executive of a public sector financial institution said the current volatile market conditions have heightened the risks. RBI is concerned with it and taking every possible step to contain further build-up of risks. Till now it was presumed that credit period was

linked to operating period. Now, it has been made explicit, said another public sector bank. Meanwhile, RBI extended the all-in-cost ceiling for trade credit till September 30 and is subject to review thereafter, RBI said in a communication to banks.

RBI also decided to keep the all-in-cost ceiling for External Commercial Borrowings unchanged. Currently, the all-in-cost ceiling over six-month Libor for ECB loans of a duration ranging from over three to five years is 350 basis points.  For long-term borrowings — duration of more than five years — it is six month Libor plus 500 bps. RBI said these ceiling caps will be applicable till September 30 and subject to review thereafter.