RBI directive on credit limits will help SME exporters

The recent directive by the Reserve Bank of India (RBI) to all scheduled commercial banks and the Exim Bank of India to compute the export credit limits of borrowers in such a way that exporters would be insulated from the depreciation of the rupee is likely to give a fillip to SME exporters, which have been struggling for funds in a depressed economic environment.

Banks extend export credit in Indian rupees as well as in foreign currency, such as pre-shipment credit in foreign currency (PCFC) and post-shipment credit in foreign currency (PSCFC), as per their own internal lending policies. While the overall export credit limits are calculated in Indian rupees, the foreign currency component of export credit fluctuates, depending on the prevailing exchange rates.

Owing to depreciation of the rupee, the un-availed component of foreign currency export credit was reduced for exporters. And if the foreign currency component was availed of, it was revalued at a higher value in terms of the rupee; exporters were asked to reduce their exposure by part payment. Further, if the export credit limit wasn't fully disbursed, the available limit for borrowers was reduced and exporters were deprived of funds.

Taking cognizance of the various representations made by organisations of exporters, RBI suggested that banks should calculate the overall export credit limits on an on-going basis, say, monthly, based on the prevalent position of current assets, liabilities and exchange rates, and reallocate the limits towards export credit in foreign currency.

The Federation of Indian Export Organisations' northern regional chairman, S C Ralhan, told Business Standard, "Earlier, we had requested RBI to look into the issue. The directive will definitely give a boost to SME exporters, as their working capital will not be blocked."

He added, "The fluctuation of the rupee had impacted borrowings in foreign currency adversely and as a result, revaluation at a higher value in terms of Indian rupees resulted in the exporter being asked to reduce their exposure by part payment. Where the export credit limit is not fully disbursed, the available limit is reduced, depriving exporters of funds."

Echoing similar sentiments, Ashwani Kohli of the Punjab Chamber of Small Exporters said, "In the current depressed economic scenario, the RBI directive will give SME exporters essential working capital. Otherwise, many SME accounts would have become bad debts. We welcome the RBI decision and further request that margin money on pre- and post-shipment be brought down to zero. It is currently hovering around 10-25 per cent."

According to the RBI circular, alternatively, banks can also denominate the foreign currency component of export credit in the foreign currency to protect exporters from rupee fluctuations.