Forex credit rates under review

The Reserve Bank of India (RBI) is reviewing the interest rates on foreign currency credit given by banks to exporters and interest rates paid by importers for borrowing overseas.

According to bankers close to the development, the interest rate for the foreign currency credit has become unrenumerative for banks to lend.

The issue has already been raised by the banks in various forums with RBI and is also being discussed internally in the central bank this week. The RBI usually takes stock of various issues before finalising the monetary policy announcement.

At present, a domestic bank cannot charge more than 75 basis points over London Interbank Offered Rate (LIBOR) for lending to an exporter for a year. Similarly, an importer should not pay more than 100 basis points over LIBOR for a six-month credit. LIBOR is the international interest rate benchmark for the banks giving foreign currency credit.

According to the bankers, funds have become costlier in the domestic and the international markets. While in the domestic market, one-year funds are available to the banks at 11-12 per cent, in the overseas market banks with sovereign rating has to pay not less than 150-200 basis points over LIBOR and the rates are even higher for other banks.

If a bank has to lend to the exporter at LIBOR plus 75 basis points, it comes to 2.75 per cent even when the LIBOR is at 2 per cent. This is as against a cost of funds at 4/5 per cent, including the transaction costs.

Sources said the review is timely since RBI has already revised the interest rates on the foreign currency denominated deposits. Among measures announced recently to enhance the flow of foreign exchange into India, the central bank raised the cap on foreign currency non resident deposits and non resident external rupee deposits.

While the interest rates for deposits of one-, three-year maturity has been capped at 50 basis points over LIBOR as against LIBOR rates earlier, there is a ceiling of 25 basis points below LIBOR as against 75 bp below LIBOR earlier.