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| Credit cost to slow export growth |
| T N C Rajagopalan / Feb 06, 2012, 00:57 IST |
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Last week, the government reported a 25.8 per cent growth in exports for April-December 2011, adding these were only rough estimates subject to change. Responding to the news, the Federation of Indian Export Organisations (FIEO) said the country was likely to miss the export target of $300 billion set for the current financial year. Also, it would be difficult to log $500 billion exports by 2013-14, as this would require a compound annual growth rate of 29 per cent, pointed out FIEO president M Rafeeque Ahmed.
Among the many factors that impede export growth, Ahmed flagged the cost of export credit as very important. “The rate of export credit has moved from 11.5 per cent to 13.5 per cent. Even for those eligible for interest subvention, this works out to between 9.5 per cent and 11.5 per cent. These rates are much above the international benchmark and roughly four to five per cent above the rate paid by our competitors,” he said.
The FIEO head called for an extension in the interest subvention scheme beyond March 31, across all sectors, given the slowdown. At present, it is available only till the end of the current quarter — and is confined to exporters of handicrafts handlooms, carpets and small- and medium-scale manufacturers. Commerce minister Anand Sharma echoed similar views at the recent Saarc Business Summit.
While the cost of export credit is a matter of concern, the availability does not seem a major problem in India. But, elsewhere in the world, the availability of trade finance seems to be getting difficult. A recent joint study by the International Chamber of Commerce and International Monetary Fund says factors contributing to the negative outlook for 2012 are primarily financial constraints, reducing the availability of trade finance. This is particularly acute for large banks and those with business in developing countries. The study shows recent European bank deleveraging has led to tighter lending guidelines and reduced availability of credit/liquidity. In addition, US dollar funding cut banks for non-American financial institutions may exacerbate the situation, since trade remained largely denominated in dollars.
The noteworthy part of the report is the apprehension that preparation for the implementation of Basel III banking norms seems to be already adding pressure on the cost of funds and the availability of liquidity. Specifically, by not treating trade finance as a low-risk asset class from a regulatory perspective, the new Basel capital framework could make trade finance less accessible and less affordable to exporters and importers, especially small- and medium-sized enterprises. A more stringent regulatory environment — as represented by the new Basel capital framework — which may hinder a trade-led recovery may be of concern to many countries attempting to export their way out of their currently dire economic conditions, says the report. ICC holds that trade finance is a relatively low-risk asset class that should not be feared by banks.
So, the message for FIEO and other industry associations is that besides asking for export credit at lower rates, they should also plead with Reserve Bank of India to carefully study the potential unforeseen impact of the proposed Basel III changes on trade finance worldwide. And play a pro-active role for prudent regulatory requirements to avoid adverse pressures on trade flows that might adversely impact growth worldwide and our own export growth.
email : tncr@sify.com
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