In the recent guidelines, exporters have been allowed to borrow twice the average amount of annual exports during the previous three years subject to a maximum of $100 million. Earlier, exporters had to borrow up to their average export earnings for the past three years subject to a maximum of $15 million.
How will this move help the exporters? The answer is in the form of low borrowing cost. Consider this:
If an A grade corporate is an exporter, then it has a natural hedge against rupee fluctuations.
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Thus, at the current Libor rate of 5.5 per cent plus 100 basis point, the cost of fund works out to 6.5 per cent. This is much
lower compared to current prime lending rate (PLR) of 14.5 per cent.
However, if the corporate is not an exporter, it would have to go in for the forward premium which is nearly 7 per cent.
This, in turn, increases the cost of funds to 13.5 per cent. As such, for exporters, external commercial borrowing makes more sense. Since the rupee has been stable for quite some time, this could be an ideal way to help exporters without affecting the rupee. It is most likely that to this extent, banks may lose the business.