Exim Bank expects G-sec linked loans to pick up

In a rising interest rate scenario, Exim Bank (Export-Import Bank of India) expects products benchmarked to government security (G-sec), than base or benchmark prime lending rate (BPLR), to gain more popularity among exporters.

Companies should opt for loans benchmarked to government security (G-sec) as that would help them insulate from the pressure of rising interest rates, said T C A Ranganathan, Chairman and Managing Director, Exim Bank (Export-Import Bank of India) on the sidelines of a banking conclave organised by the Federation of Indian Chambers of Commerce and Industry here on Friday.

The bank had recently introduced G-Sec linked products, and the demand so far had been good, he said.

In general, interest rates have a direct impact on currency exchange rates. A currency offering a high interest rate often attracts buying of that currency, thus strengthening against other currencies. A higher currency leads to lower profits for exporters, though it helps importers.

“Our interest rates have been raised in tandem with the market. If companies want to insulate themselves from the pressure due to the rise in interest rates, then the best thing for them is to go for G-secs based borrowing as it is the most market friendly,” said Ranganathan.

The Reserve Bank of India (RBI) raised its key lending rates by 50 basis points at eight per cent on July 26 to tame inflation. This was for the 11th time since March 2010 that the RBI had raised lending rates.

“Loans linked to G-Secs rise in tandem with the market but when the liquidity position improves, these loans are usually the first ones to fall. They are completely transparent. We feel corporates must be assisted in protecting themselves so we had started giving such loans three-to-four months back. Companies are showing interest in such loans,” he said.

This apart, in order to offset the high cost of credit, small and mid-sized companies should adopt a cluster approach and increase value addition in order to enhance exports from the region, he said.

“Instead of individual efforts, firms should adopt a cluster approach to enhance their sourcing of orders and raw materials, fulfill their commitment to bulk export orders and enhance economies of scale and facilitate access to finance,” he said.

India's share in world trade at present is between 1.3-1.8 per cent. “Times will be turbulent, and extremely challenging. The scenario will be difficult in terms of cost and interest rates. One cannot keep asking for subisdies,” said Ranganathan.