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M. Ramesh

Chennai , Oct. 25

MR R. Parthasarathy, who owns a small-scale auto components export business here, is unable to understand why his bank cannot give him a cheap foreign currency loan, when the country's forex reserves are brimming.

He asked his banker for a foreign currency loan, technically called PCFC, short for `packing credit (in) foreign currency', but the banker said no. The bank, Mr Parthasarathy was told, did not have enough foreign currency to offer this facility.

Mr Parthasarathy, like hundreds of other small and medium scale exporters, have heard that the Government has allowed banks to make export-credit in foreign currency available at a rate `not exceeding Libor plus 0.75 basis points'. At this rate, an exporter should be able to access dollar credit at less than 2.5 per cent per annum, far lower than the `around 7.5' per cent that banks charge for rupee packing credit.

There is a reason for the disconnect between the country's $90-billion forex reserves and banks saying "no" to foreign exchange credit seekers. The bulk of forex reserves are with the Reserve Bank of India, made up of dollars brought in by foreign investors and dollars purchased in the market.

Banks too have foreign exchange — deposits made by non-resident Indians into `FCNR (B)' accounts. But a handful of large banks have most of the dollars paid into FCNR (B) accounts and exporters' foreign currency accounts. These banks have long given away these funds as loans to large, credit-worthy corporates at rates more attractive than PCFC loans.

The corporates give banks' business elsewhere, in return for FCNR (B) loans, which work out cheaper for them.

Small businessmen, like Mr Parthasarathy, have been left in a limbo, as far as cheap loans go.

Everybody agrees that if India's manufacturing economy (and hence, employment) is to thrive, small-scale industries, especially small-scale exporters, should be helped along.

It is in this context, that bodies like the Federation of Indian Export Organisations (FIEO) have called upon the RBI to make foreign currency funds to banks, for lending to exporters. "Most of our forex reserves are parked outside India, at overnight interest rates," observes Mr K.N. Deenadayalan, Treasury Head, Farida group, footwear exporters. Overnight interest rates are at LIBID, or `London Inter Bank Bid' rates, which are lower than Libor. By lending to exporters, the foreign exchange funds could be parked more profitably, Mr Deenadayalan says.

Exporters want RBI to open a fund from which banks could borrow, and lend to exporters. However, there are some problems.

When the dollar funds finally get into the hands of exporters, they will sell the dollars. This, in turn, will increase dollar supply in the market, fuelling a further appreciation of the rupee. Second, since RBI will buy dollars with rupees, it will increase the rupee liquidity in the system.

Experts like Mr Deenadayalan recognise these problems, but say they can be managed. Any excess liquidity could be sucked out, as usual, by selling Government securities. The prospect of a further appreciation of the rupee may again not be alarming, because of the current account deficit of $1.2 billion in the April-June quarter — which should increase the demand for dollars and act as antidote to rupee appreciation.

The President of FIEO, Mr Rafeeque Ahmed, told Business Line that when FIEO suggested to RBI that the central bank might fund banks' PCFC lending, RBI officials said, "The policy did not allow this". FIEO has a simple suggestion: scrap the policy.

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