Lower Export Finance Rate Presents A Profitable Avenue For Banks

The lowering of the export refinance rate by 200 basis points has presented a short-term arbitrage opportunity and an additional income-earning avenue for banks. "Banks eligible for export refinance can now avail it at seven per cent and deploy it in treasury bills, earning a spread of around 100-200 basis points," said V H Ramakrishnan, general manager, Bank of India.

This was not possible earlier when the export refinance rate was nine per cent, and the yields on treasury bills in the primary market were comparatively lower. Recently, the Reserve Bank of India (RBI) had hiked the implicit cut-off yield on 364-day t-bills at the primary auction by around 100 basis points. At the latest auction, the RBI had given an implicit cut-off yield of 9.04 per cent.

The lower export refinance rate is thus being viewed as providing a profitable avenue in the money market, rather than a boost to export credit. This is because, in the present scenario, banks would rather borrow in the call market than go in for refinance at a higher rate. The surge in liquidity witnessed of-late and assured inflows through the Resurgent India Bonds may not see the call rate moving above the seven per cent level for some time.

The slash in the export refinance rate could also have effectively form a sub-ceiling at seven per cent. "Call rates may not cross the 5-6 per cent range now, against 6-7 per cent seen lately, " said a banker. "Those who are eligible for export refinance would go in for it only when the call rate touches seven per cent, thereby setting a sub-ceiling at this level," said a dealer with a large nationalised bank. Presently, the general refinance rate at 9 per cent forms a cap on the call rate. However, how far the export refinance rate would act as a sub-ceiling would largely depend on how much exports have grown since Feb 1996 and the funds eligible for 100% export refinance on incremental exports since.