This story, reported in the Economic Times of India (hat tip Elaine Meinel Supkis), that Indian banks are unable to draw on their dollar denominated lines of credit, isn’t as dramatic as the news that major banks are asking UK clients not to borrow. However, it serves to illustrate the disruptive effects the credit crunch is having in remote and seemingly unlikely quarters.
The article doesn’t explain exactly how the lines of credit to Indian banks are being restricted. Under a conventional line of credit, a borrower pays a fee to have access to a credit facility up to a certain maximum at a specified rate, say Libor + a spread. It sounds as if the terms of these agreements have been abrogated, either by the foreign bank simply refusing to honor the standby commitment, or by it demanding such a high (and presumably non-contractual) rate so as to discourage use. The likely repudiation of existing agreements is a particularly disturbing subtext to this article.
From The Economic Times (India):
Banks have stopped giving dollar loans to exporters. According to banking industry officials, they can no longer afford to offer dollar loans as their own foreign currency credit lines have dried up.
Indian banks have been drawing foreign currency credit lines from international banks to lend to local exporters. Now, with the subprime fiasco severely impacting the global money market, high-street banks in the US and Europe, even reluctant to lend each other in the term money market, are in no mood to extend credit lines to Indian banks.
And even if they do, it will be at a price that is higher than what local banks can charge exporters. Under the RBI norms, banks can charge a maximum of London inter-bank offered rate (Libor), plus one percentage points for dollar loans, commonly called packing credit in foreign currency (PCFC).
“Liquidity has become so tight that we would be losing money if we give PCFC loans to exporters,” says the head of trade finance of a private bank.
Exporters use PCFC loans to process goods as well import raw materials. Since the interest on such foreign currency loans are significantly lower than rupee loans, PCFC helps them to save on cost.
Particularly at a time when the rupee is appreciating against the dollar. “Credit denominated in rupee means paying higher transaction cost, and this can be more than 50% of the interest rate currently paid under PCFC,” says All India Rubber Industries Association (AIRIA) president M F Vohra.
Rajesh Exports chairman Rajesh Mehta says his firm is also facing a problem with regard to dollar loans. Banks don’t have dollars and are increasingly asking borrowers to take rupee loans.
“We deal with eight to nine banks. The problem is more acute in smaller banks,” says Mr Mehta. If at all banks give dollar loans they are demanding a kind of service charge which is over and above the interest ceiling. This is against RBI norms.
Mr Vohra says exporters plan to raise the issue with the Directorate General of Foreign Trade (DGFT). If an exporter is bringing the proceeds in dollar, then credit should be made available in dollars.
He feels that nationalised banks should find a way to give foreign currency loans to exporters, who have already taken a huge blow on their margins because of the appreciating rupee. Non-availability of cheap dollar loans will only add to the exporters’ blues.