Export credit inclusion nullifies overseas borrowing limit hike

The inclusion of short-term borrowings has nullified the hike in ceiling on overseas borrowings, according to banks.

The RBI, in its mid-term review of the 2006-07 monetary policy yesterday, raised the ceiling on overseas borrowings by banks to 50 per cent of their unimpaired tier-I capital from 25 per cent earlier.

But it has included short-term borrowings (of up to a year), which are used by banks to provide export credit, within the ceiling. This has now restricted short-term borrowings to 20 per cent of Tier I capital within the overall foreign borrowing. Bankers said the doubling of the limit has no meaning as inclusion of borrowings for foreign currency export credit has not left much room for banks, which had already touched the earlier 25 per cent ceiling.

Foreign banks would be badly hit as they do not have a large capital base and would have to curtail their foreign currency export loan books. This will force exporters to turn to large Indian banks for export finance in foreign currency, a senior foreign banker said.

Most foreign banks now have short-term overseas borrowings, which are used to provide loans to exporters, in excess of the limit. Earlier, there was no ceiling on such borrowings. The sub-limit within the overall overseas borrowing ceiling restricts the amount of foreign currency funds that banks can borrow up to 1 year funds from overseas to lend to exporters.

Smaller Indian banks will be affected too. Large Indian banks that have large Tier I capital would gain as exporter clients of foreign banks would turn to them for finance. This could halve the export credit facilities in foreign currency provided by foreign banks.

For exporters, this ceiling means they have a lesser choice in deciding which bank to approach for foreign currency loans. Officials with foreign banks said they will need 3-6 months to unwind their short-term foreign currency borrowings deployed for export credit.

The interest rates charged for export credit in foreign currency would also move up to the ceiling of Libor-plus 100 basis points. Most banks borrow short-term funds abroad for up to a year at 20-30 bps above one-year Libor, which is about 5.4 per cent. The bulk of export credit now is for 180 days. Large banks have a dominant share of 50-60 per cent and foreign banks have a share of 15-20 per cent.

Bankers said the increase in ceiling on banks' overseas borrowing has been negated by the inclusion of borrowings for export credit within it.

Large Indian banks also have an advantage as they depend more on non-resident deposits to provide export credit in foreign currency.