In order to boost the confidence of exporters at a time when global trade is declining in wake of recession, the government plans to ask the Reserve Bank of India (RBI) to relax rules governing forex credit. The move will help banks extend dollar loans to cash-strapped exporters at easier terms.
A major step in this area will be raising the ceiling of maximum interest payment that Indian exporters can pay on international loans from currently 1% above libor (London Interbank Offered Rate) to 4% above libor. Libor is the rate at which international banks borrow from each other in Europe and also serves as a benchmark for corporate loans.
Raising the ceiling will help increase the flow of funds to exporters. After the credit crunch overtook international markets, the cost of dollar funds for Indian banks increased to between 2% and 2.5% above Libor and therefore they are also not in position to lend to exporters within the current rate cap.