Finance ministry tells banks with overseas presence like SBI, ICICI to arrange credit to boost sh....

NEW DELHI: The finance ministry has directed banks with substantial overseas presence to arrange credit for Indian exporters in a bid to halt a sharp slide in shipments from Asia's third-largest economy.

Banks with overseas presence will have to extend credit directly or make funds available to exporters through smaller banks for which arrangements have to be finalised within a week, the finance ministry has told chief executives of public and private sector banks in a letter sent on Monday.

The letter says 'big banks', by which the ministry seems to mean lenders such as SBI and ICICI Bank that have a large overseas presence, will have to work out within a week a mechanism to fund smaller banks to ensure flow of credit to micro- and small-sector exporters.

"We have told big banks to help customers of smaller banks by lending directly to these banks with a mark-up of not more than 10 basis points," a finance ministry official told ET, adding that a flight from risk in the international markets had reduced availability of foreign exchange.

India's exports declined 4.2% in May as demand slowed in the European Union, negating the impact of the moderation in imports on India's current account deficit that climbed to a post-1991 high of 4.2% of GDP in 2011-12.

The trade deficit, which is a sub-set of the current account, rose to $189.9 billion in 2011-12 from $130.6 billion in 2010-11.

Exporters afraid of volatility

The move is intended to urgently address the issue of timely availability of credit that exporters say can help them push goods.

"Export promotion is the highest national priority in view of the persistent current account deficit and the pressure on Indian rupee," said the finance ministry official.

"Exporters are shy of taking loans in foreign currency even at a lower cost due to the volatility in exchange rates," said SP Agarwal, president, Delhi Exporters Association.

The government had in May deregulated the rate of interest on export credit extended in foreign currency to enhance the availability of funds after outlook for exports deteriorated.

The new measures are designed to augment the flow of credit to the sector as the ministry feels dollar loans will be cheaper than rupee funds available locally.

Big banks should not charge smaller banks a spread of more than 10 basis points on such funds, the ministry has directed, to ensure the cost of credit remains competitive.

The ministry has also asked banks to extend term loans to exporters for modernisation and to finance equipment purchase.

Exporters said while the step was in the right direction, its efficacy was open to question.

The RBI had raised the rupee export credit refinance limit in its June 17 credit policy review to give a leg up to exports.

Source : timesofindia.indiatimes.com