Financial Daily from THE HINDU group of publications
Wednesday, Jun 15, 2005
Industry & Economy
Money & Banking - Interest Rates
`SMEs may be hit if interest rate cap on export credit is hiked'
New Delhi , June 14
THE Federation of Indian Export Organisations (FIEO) said on Tuesday that the proposal to hike the interest rate ceiling on export credit in foreign currency by 25 basis points may affect small and medium enterprises (SMEs) that are exporting on wafer-thin margins.
The RBI-constituted Working Group to review export credit had recommended that the interest rates on export credit in foreign currency may be raised by 25 basis points, i.e., to London Inter-bank Offer Rate (LIBOR) +1 per cent (for credit up to 180 days).
For credit more than 180 days, the interest rate ceiling has been recommended at LIBOR + 3 per cent.
The recommendation was, however, subject to the condition that banks would not levy other charges in any manner under any name (such as service charge and management charge except for recovery towards out-of-pocket expenses incurred).
Hailing the RBI's initiative to review the existing export credit schemes, the FIEO President, Mr O.P. Garg, however, highlighted that a scheme can be said to be successful only if it reaches the "last man in the queue."
He highlighted that the deregulation of interest rates more often than not has put the SME exporter at a disadvantage vis-à-vis large corporates.
The report of the working group has now been made available for public comment.
The group has recommended that banks should refrain from levying service charges linked to the amount lent.
It has also suggested that banks should give priority to the foreign currency export credit requirements of exporters over foreign currency loans.
While demand for export credit in rupees is low, the working group noted that there is persistent demand for more export credit in foreign currency in view of the cost advantage over the export credit in rupees and the arbitrage opportunity.
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