Forex loan window shuts for small firms

Small firms now have nowhere to go if they want to raise foreign currency loans locally. Commercial banks have exhausted their kitty of over $17 billion in foreign currency deposits, leaving small companies high and dry.

But large firms will remain unaffected by this as they have the capacity to raise funds from international markets. Exporters, too, have the option of export refinance.

The foreign currency deposits of non-resident Indians (NRIs) have shrunk. For this, banks are blaming the Reserve Bank of India's (RBI) "artificial" ceiling on interest rates offered on foreign currency non-resident (FCNR) deposits. Chiefs of two large banks told Business Standard that they did not have any funds in their FCNR(B) kitty to lend to firms.

"Banks have been facing a problem in mobilising FCNR deposits for almost a year now. That is because the interest rate differential between domestic and overseas rates has narrowed. Non-resident depositors now earn a higher interest overseas than in India," said IDBI Bank's commercial banking CEO GV Nageswara Rao.

Bankers feel it is time to liberalise interest rates on FCNR deposits. Foreign currency deposits with banks dipped by Rs 494 crore in the first quarter of 2005-06, against a rise of Rs 953 crore in the same period last year.

HSBC's head of commercial banking Subir Mehra said small cap companies were badly affected with the exhaustion of foreign currency funds.

Small and medium companies required small foreign currency loans and had no other option but to revert to rupee denominated borrowings, Mehra pointed out.

Brijesh Mehra, ABN Amro Bank's head, global clients and wholesale clients, said in the recent past, NRIs had chosen equity markets as a preferred investment destination, as the attractiveness of FCNR deposits over other similar risk investment opportunities abroad had reduced.

Another banker said amid hopes of the RBI raising the ceiling on FCNR deposit rates, Indian banks had been coping with the situation by borrowing from their overseas branches or taking the external commercial borrowing route.

Indian banks and corporates have raised a total of $2-2.5 billion in 2005 so far.