6/12/13 Why we will export or perish | Business Line Why we will export or perish S. Adikesavan www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece?homepage=true&css=print 1/5 6/12/13 Why we will export or perish | Business Line Exports need a push in these stressful times. — Sushil Kumar Verma There is no sector more deserving of ‘priority’ status for bank loans today than exports. At a time when the rupee is under pressure from widening current account deficits and drying up of foreign capital inflows, promoting exports should be top priority for the country’s policy-makers. The old slogan, “export or perish”, cannot be more relevant for the Indian economy than in today’s troubled times. It is in this context that the recent report of a Reserve Bank of India (RBI) technical committee, headed by its Executive Director, G. Padmanabhan, deserves to be taken seriously. From a banker’s perspective, it contains many realistic and workable recommendations that have the potential to substantially improve the flow of credit and reduce transaction costs for the export sector. Export credit as a proportion of total bank loans declined from 9.3 per cent in 2001 to 3.7 per cent in 2012, as outlined in the Finance Ministry’s latest Economic Survey for 2012-13. This happened even as the value of India’s exports grew from $44.56 billion in 2000-01 to $304.62 billion in 2011-12. While this data would suggest that bank finance is not so much of a driver for export growth, the importance of the flow of credit, especially when exports are plunging (they fell to $300.6 billion in 2012-13), cannot be underplayed. There are at least three key recommendations of the RBI technical committee that can and need to be implemented straightway. A national priority The first is the suggestion to include export credit under the Priority Sector Lending (PSL) targets set for Indian banks. All commercial banks in India are mandated by the RBI to direct 40 per cent of their net bank credit to the ‘priority sectors’, which broadly cover agriculture, micro and small enterprises, loans to weaker sections, and educational/housing loans. There is no other sectoral deployment of credit that is monitored by the central bank so closely as the PSL target, and rightly so. Most of the segments under PSL are employment-intensive sectors and contribute to both economic growth and equity. www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece?homepage=true&css=print 2/5 6/12/13 Why we will export or perish | Business Line The RBI has also stipulated stiff penalties for non-achievement of PSL targets, with banks having to contribute the amount of shortfall to the Rural Infrastructure Development Fund (RIDF), where they would earn yields less than their cost of funds. The close monitoring of the PSL target achievements and the ‘RIDF penalty’ impacting their bottomline makes banks strive hard to increase coverage under the PSL segment. Given that the banking industry as a whole has been running short of its PSL targets during the last decade, making export finance a part of PSL will bring better focus to export credit marketing by banks. It would also afford an opportunity to banks to get a better return by lending for exports, rather than contribute to the RIDF. In the process, there is also the real possibility of the cost of export credit being reduced further. As the average return on RIDF deployment is not more than 6 per cent, it would make better sense to lend to exporters even at their ‘base rate’ (below which banks cannot lend) provided the credit risk on the borrower is acceptable. As regards extending ‘priority’ status to exports, no one can really grudge that in today’s situation where the country is grappling with extreme balance of payments stress, bringing back memories of the dark days of 1990-91. In terms of credit decision-making, the PSL tag will help exporters as collateral security and other norms are generally viewed sympathetically when it comes to exposures to the ‘priority sectors’ by commercial banks. Statutory relaxations The second key recommendation by the Padmanabhan Committee is that Foreign Currency Non-Resident (FCNR) deposits and Export Earner’s Foreign Currency (EEFC) balances should be exempt from cash reserve ratio/statutory liquidity ratio requirements, to the extent banks deploy these to extend export finance. The logic advanced by the panel for this proposal is that export credit re-discounted by Indian banks abroad is at present already exempt from CRR/SLR requirements. In effect, what the committee has suggested is to level the field for foreign currency sources used by Indian banks for on-lending to exporters. The elimination of the burden of CRR/SLR on both pre-shipment and post-shipment credit in foreign currency will surely improve the cost-effectiveness of export finance, benefiting both exporters and banks, again with a strong www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece?homepage=true&css=print 3/5 6/12/13 Why we will export or perish | Business Line possibility of reduction in interest rates. Alternatively, the panel has proposed that exporters be allowed to borrow under the RBI’s ‘trade credit’ norms directly from banks abroad, on the strength of letters of comfort issued by Indian banks. As of now, this facility is available for importers under what is called ‘buyers credit’ and the cost of such loans is only about 200-250 basis points above the London Inter-Bank Offered Rate (LIBOR). If importers can avail cheap finance from abroad, there is definitely no reason to not offer the same facility to exporters. Merchanting trade The third recommendation pertains to issues relating to ‘merchanting trade’ transactions, which refer to exports and imports undertaken by domestic entities where the goods per se do not enter nor are from the country. Merchanting trade volumes are mainly determined by the availability of banking facilities for document handling and ease of finance. It is true that merchanting trade does not contribute directly to exports from India, but these transactions can still lead to net foreign exchange inflows by way of profits accruing to the Indian entities undertaking them from overseas locations. The possibility of this is even higher, when one takes into account Mumbai’s potential to become a major financial centre rivalling Singapore or Dubai. It is most appropriate, therefore, that the technical committee has suggested major relaxations in the existing RBI norms pertaining to merchanting trade, which are rather restrictive. On the whole, what sets apart the Padmanabhan committee report is that it is focused and practically oriented. No high-flying rhetoric – just sensible suggestions which can be implemented without much ado. (The author is with the State Bank of Patiala. The views expressed are personal) (This article was published on June 11, 2013) Keywords: Export, policy-makers, foreign capital inflows, bank loans, Reserve Bank of India, export credit, trade volumes Printable version | Jun 12, 2013 6:08:02 PM | http://www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece © The Hindu Business Line www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece?homepage=true&css=print 4/5 6/12/13 Why we will export or perish | Business Line www.thehindubusinessline.com/opinion/why-we-will-export-or-perish/article4804275.ece?homepage=true&css=print 5/5