Cut Compels Banks To Halt Export Credit

The Reserve Bank of India's (RBI) directive to banks to cut interest rates for export credit by 100 basis points seems to have backfired as most banks have stopped disbursing export credit. "We can't afford to disburse export credit at the new rate," said a bank chairman.

The RBI on September 24 cut the export credit rate by one percentage point by directing banks to extend credit at two per cent below their prime lending rate (PLR) instead of 1 per cent below PLR. Since most public banks' short-term PLR is now pegged between 10 per cent and 10.5 per cent, they are required to extend export credit at least at 8-8.5 per cent.

 

"Since the RBI has not reduced the refinance rates for export credit, it is just not feasible to extend loans at this rate," said a senior banker.

Liquidity flush banks are placing money at risk-free overnight call money market and low yielding government securities. "We cannot lend export credit at such a low rate as we need to factor into the non-performing assets (NPAs) while pricing the loan," pointed out the banker.

The bank and refinance rates, both which are at 7 per cent, have been moving at tandem for some time.

"The RBI should have gone in for an interest rate cut when the exports were picking up. This would have given a boost. Our exports have suffered in view of the global slowdown coupled with the recent US crisis. Exporters are taking packing credit but not using them," said a banker.

Banks have to lend 12 per cent of the total credit for exports. However, for foreign banks this is a part of the priority sector lending. But for Indian banks, which have to lend mandatorily 40 per cent of their advances to the priority sector, the minimum 12 per cent export credit does not come under the priority sector.