Lower Spreads To Hit Banks

The Reserve Bank of India's (RBI) directive to the banks to reduce interest rates for export credit across the board by 100 basis points will translate into lower spreads for banks, thereby affecting their profitability, bankers said.

"The RBI has not reduced the refinance rates for export credit. Banks are going to face a squeeze on the spreads which would in turn affect their profitability," said a senior banker adding that RBI may have been more worried about the well-being of the exporters than the banks.

But bankers said since the refinance rate is pegged to the bank rate, perhaps the RBI may be working on cutting the bank rate soon.

 

Bankers were also critical of the timing of the cut in interest rates. "The RBI should have gone in for an interest rate cut when the exports were doing well. This would have given an added boost. But now since our exports have suffered in view of the global slowdown, such a rate cut may not make much impact. Also interest cost is only a part of the bigger picture. Exporters have to be competitive in the international scenario if they have to make any mark," pointed a senior banker from the private sector.

"These measures are not particularly meaningful. As it is exporters, post-WTC events, are finding the going difficult as the US has restricted entry and the freight rates have shot up. The only effect of this move by the RBI is that forward premium could come down," said a leading advisor to exporters.

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

According to senior public sector banker, "If the central bank had included the export credit as part of the priority sector, then banks will show an enthusiasm to enter the field. The viability and number of opportunities are more in export credit compared to other priority sector lendings."

On the move for a special financial package for exporter-manufacturers, bankers felt it was in sync with the economic cycle globally. "With recession affecting global markets, credit cycles are getting longer. Indian exporters in order to stay competitive will need to have longer credit. It would be level playing for exporters," said another banker.