RBI removes ceiling on export loan rates from July .

MUMBAI: The Reserve Bank of India (RBI) has put an end to concesssional interest rates on export loans by freeing the pricing of these loans with effect from July 1. The move has worried exporters who already face the downside of a strengthening currency, but banks have said there will not be much of a change for exporters under the new regime.

So far, interest rates charged on export finance by banks were capped at 250 basis points below the bank’s prime lending rate. RBI has said banks can now either lend at their base rate or above the base rate, which will be the new benchmark for all floating rate loans from July 1. The concessional loans were hitherto available for both preshipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days.

RBI has now told banks that they are ‘free to decide the lending rate on export credit at or above the base rate with effect from July 1.’

Despite the deregulation, bankers feel that exporters are likely to be charged more-or-less the same rate as they were charged in the past. Many a times less creditworthy clients were charged more through higher transaction fees such as processing charges. Lenders say new guidelines are unlikely to change the overall cost of funds for exporters.

However, the move to deregulate rates have rattled exporters. The Federation of Indian Export Organisation president A Sakthivel said the organisation has written to the finance ministry and the commerce ministry that RBI’s move to free rates will not help exporters. They have proposed that banks should charge 2.5% below the base rate to exporters. They have urged that many exporters from competing countries avail loan at a much cheaper rate than India.

For long, RBI has been very protective about rates banks can charge to exporters. It has stipulated that banks could not change more than 2.5% below PLR on pre-shipment up to 270 days and post-shipment credit up to 180 days.

As a result, most PSU banks charged exporters in the range of 9-10 % as their PLR was in the range of 12-13%.

Further, to promote export, RBI has said 10% of the total credit should comprise loans to exporters in case of private and public sector banks. Unlike PSU and private banks, for foreign banks, export credit is part of its priority sector lending.

Banks on the other hand say exporters may not have to pay more with the deregulation of rates. “For several years, RBI regulated interest rate that can be charged to exporters. Now that the minimum rate that can be charged is minimum so that banks bear in lending, the rate has been deregulated,” said a senior banker from a public sector bank.

Bankers were anxiously waiting for RBI’s decision on this matter. In its final circular on base rate, the central bank will separately come out with stipulation of export credit. Some banker feared that RBI may link export credit to base rate.

Source : The Economic Times