The Hindu Business Line : Banks find it hard to get export bills rediscounted

Bangalore/Chennai, April 1 The sub-prime crisis has hit Indian banks’ efforts at raising US dollars through rediscounting of export bills in the international market. This was one window that helped ease dollar shortages in the domestic markets.

A banker said, “That market is dead for all practical purposes.” This facility was no longer available on the past terms. In fact, the terms have hardened. Bankers said that till last year, most banks were in a position to source short term cross border resources for up to a year at spreads as low as 25 to 50 basis points.

Currently, spreads have climbed to about 200 basis points over LIBOR. Under the Reserve Bank of India guidelines, for post-shipment credit in foreign currency, banks are permitted to rediscount eligible export bill at rates to the exporters that are not to exceed more than 100 basis points over the London Inter bank offered rates (LIBOR). However, the spread between the borrower and lending banks is left the discretion of the counter-parties.

This rediscounting is to be only on a ‘non recourse’ basis (i.e. The risk of realising the bills is entirely on the agencies rediscounting the bills). The rediscounting is also permitted, by using the Bankers Acceptance facility. In this case though, it is normally done on a ‘with recourse’ basis, which is permitted by the RBI.

Tightening spreads

A ‘with recourse’ gives the instrument more liquidity and tradeability. But even if the bills are rediscounted, the final lending rates to exporters are not expected to exceed 100 basis points over LIBOR, under RBI guidelines. This, in turn, means that while banks would be re-discounting the bills at rates close to 200 basis points over LIBOR, exporters would be receiving the funds at a maximum of 100 basis points over LIBOR, a deficit of 100 basis points for the lending banks, making the entire lending unattractive.

The tightening of spreads was partly on account of some of the foreign banks limiting their credit lines. “The sub- crisis has resulted in choking of international credit lines,” the banker said. This was even on a full recourse rediscounting. Besides, some rediscounting was done from onshore facilities itself. The rediscounting from domestic market was done from banks’ foreign currency accounts, usually FCNR, Resident Foreign currency account or Export Earners Foreign currency account.

But even these windows have shrunk, as FCNR and RFC depositors have migrated to rupee accounts, in view of better interest realisation.

Dollar shortage

The rediscounting window cut-off was one of the major factors leading to a shortage of cash and spot dollar in the markets. The shortage had pushed up the dollar- rupee exchange rate to over Rs 40.25. The non- availability of rediscounting has resulted in exporters rolling over their commitment under the Pre-shipment credit in foreign currency. Normally, PCFC credits are set off against the rediscounting receipts. But bankers are bracing for further tightening of dollar availability, as the sub-prime casualties increase.

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