The Reserve Bank of India is learnt to be looking at reviewing the interest rate structure on foreign currency denominated packing credit available to exporters.
PCFC provides an additional window for pre-shipment credit to exporters at internationally competitive interest rates.
It is applicable to both domestic and imported inputs for export goods, in any convertible currency, for a maximum of 180 days.
Pre-shipment credit is provided as a loan or advance by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment.
The RBI has already deregulated post-shipment credit beyond 90 days till 180 days, with effect from May 1, 2003.
The RBI is understood to be examining a proposal from exporters who were facing difficulty in availing concessional foreign currency packing credit.
This is because with demand for dollar loans surpassing supply, banks could manage a better margin by lending it to corporates, out of the purview of export credit.
Banking sources said by removing the cap on PCFC, which is acting as a major disincentive for banks, there will be some pressure on outflow of dollars in addition to meeting the genuine dollar demand of exporters.
According to banking sources, while the RBI wants to deregulate interest rates and leave it to the discretion of banks, there is a concern that small exporters might be hit if rates turn too high. Hence, there is also a possibility of putting a cap as well.
Exporters do not want rates to be deregulated as post deregulation, they will no longer remain concessional.
At present, the spread charged by banks for pre-shipment credit in foreign currency is related to the international reference rate such as London inter-bank offered rate Euro Libor/Euribor (6 months).
The lending rate to the exporters should not exceed 75 basis point over Libor/Euro Libor/Euribor, excluding withholding tax.
Most of the dollar loans taken by corporates through the external commercial borrowing route or out of FCNRB deposits are used for refinancing high-cost old debt and not for fresh investments, they added.
In fact, excess dollar inflows are increasingly becoming a problem to manage as with each dollar sucked out of the market, additional rupee funds is being added to the liquidity-flush system.
In addition to PCFC, under the existing norm, banks may arrange for 'lines of credit' from abroad and also negotiate lines of credit with overseas banks for granting PCFC to exporters without the prior approval of RBI, provided the rate of interest on the line of credit does not exceed 75 basis point over six months Libor/Euro Libor/Euribor.