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Absence of timely intervention by the Reserve Bank of India coupled with imprudent conduct

of commercial banks may have caused the ongoing volatility in the forex market. This is a
question that Indore-based financial analyst and long-time RBI watcher Mahesh Natani has
raised as he points to an additional looming currency crisis on account of roughly $92.5 billion
of trade credit (consisting of buyers credit and foreign letters of credit) outstanding for all
commercial banks, with $73.5 billion due for repayment over the next few months.
Mr. Natani had played a key role through the filing of a PIL in 2007 against the RBI and the
Finance Ministry in forcing the central bank to issue circulars to all commercial banks in
April 2009 to compute interest on saving accounts on the basis of daily balance. With the change
in the method of interest calculation, around 6-crore saving account holders are now earning an
additional interest of around Rs. 10,000 crore on their deposits.
Of total external debt of roughly $390 billion as of December 31, 2012, Indias trade debts
accounted for 24 per cent or roughly $92.5 billion. The SBI, in response to queries raised under
the RTI, claims that it has outstanding letters of credit of roughly $21 billion. This data is
corroborated from the RBIs website in which total external debts are listed at $390 billion, of
which, trade credits are roughly $95 billion. These trade credits comprise mainly short-term
credit by way of foreign letters of credit and buyers credit.
Mr. Natani told The Hindu that a study of recent movement on the rupee-dollar front reveals the
strong likelihood that most of these buyers credits have not been hedged by importers, which
makes them and the economy even more vulnerable to persistent forex fluctuations. The fall in
the value of the dollar from Rs. 68.35 to Rs 63.35 during the last 7 days has been unnatural
because oil companies are not participating in the forex market. They are getting their weekly
requirement of roughly $4 billion directly from the RBI.
The slip up by the RBI and Indian banks is that they allowed Indian importers importing goods
on the basis of letters of credit to be replaced by buyers credit of 3-6 months at an interest cost
of just 6 per cent against 12.5 per cent payable on working capital limit, to be borne by the
importer if the bank debits his account for the payment of the foreign letter of credit. Hedging the
buyers credit which entails annual hedging charges of 6 per cent would have made
overseas buyers credit unattractive for importers by doing away with the huge 6.5 per cent
arbitrage in interest rates. Replacement of letters of credit by buyers credit also allows
postponement of import payments in foreign currencies. The RBI has permitted this
postponement for a period of 360 days for reasons best known to it, says Mr. Natani.
Importers who had availed themselves of buyers credit in April 2013 when the dollar was at Rs.
54 panicked when the rupee fell 14% to Rs. 62 on August 16, 2013 and rushed to hedge their
buyers credit. This led to the further depreciation of the rupee to Rs. 68.85 on August 28, 2013.
The manner in which the rupee depreciated by over 11% in a short span of 12 days (from
16.08.2013 to 28.08.2013) shows that a major component of buyers credit has not been hedged
by importers, alleges Mr. Natani.
In response to queries raised by Mr. Natani under the RTI Act, the RBI has admitted that it does
not possess key details on buyers credit being availed by importers like the amount and date of
When asked, the RBI did not respond to a detailed set of questions emailed by The Hindu on
September 3, 2013.
Indias largest commercial bank, the SBI has indicated to Mr. Natani, that outstanding foreign
letters of credit as of June 30, 2013 totalled Rs. 1,22,108 crore ($18.5 billion), of which Rs.
97,170 crore (roughly $14.7 billion) are due for payment on September 30, 2013. According to
Mr. Natani, since the SBI accounts for roughly 20% of the entire banking business in India, this
translates into total outstanding letters of credit of roughly Rs. 6,10,500 crore or $92.5 billion
($18.5 billion x 5), of which roughly $73.50 billion would be due for hedging in the next couple
of months.
If fears of a further rupee depreciation prompts even 50% of the importers not to replace their
existing buyers credit on maturity with a fresh buyers credit, this could lead to a big deficit of
roughly $45 billion in foreign trade credits which is one of the key sources of funding the current
account deficit, Mr. Natani said.
Supporting Mr. Natanis premise, K.N. Dey, a Mumbai-based Forex Analyst, pointed out that,
An RBI notification of July had said buyers credit should not exceed the business cycle. Some
importers used to avail buyers credit more than the required period of their business cycle in
order to avail low cost funds. Most of the buyers credit remains uncovered, which resulted in
huge exchange rate loss to the importers when the rupee fell from 53.50 per dollar to 68.85 per
dollar last month.
According to Mr, Dey, banks have since become very strict on hedging of buyers credit, further
moving the buyers credit limit from non fund based to fund based which needs 100 per cent
Abhishek Goenka, Founder and CEO, India Forex Advisors, agrees. Importers were addicted to
buyers credit to take advantage of cheap funding, interest rate arbitrage and higher returns
derived from other asset classes and used this for their largely speculative investments, he said.
When the markets moved beyond their expectations, roughly 80 to 90 per cent of importers
were trapped. Importers who had taken buyers credit in 2011 and rolled it over continuously,
incurred losses of over 30 per cent. Buyers credit is a short-term external dollar debt, an
unfavourable liability for the country. A short-term credit of $96 billion is maturing by March
2014. This liability is increasing year-on-year and exerting pressure on the rupee, he added.
Pretty revealing piece. All this shows how stupidly we slid down the
slope. Also, we learn how to recover and progress if we stay sober and
supple. However, I can't miss the one mistake here. The rupee
depreciated only less than 13% (12.9) and under 10% (9.95) where it is
mentioned, 14% and 'over' 11%, which are, actually, the dollar's
appreciation. This is after recognising all the related values and
figures mentioned in this connection. Depreciation and appreciation
are always different. How and why? Well, The Hindu need merely
practice what it 'preached', in a brief (but partly erroneous)
explanation of this calculation on 28 Aug., 2013. Unfortunately, even
some 'experts' do not agree on this, and worse, they are unwilling to
correct themselves when their mistake is pointed out!
from: Devraj Sambasivan
Posted on: Sep 14, 2013 at 13:37 IST
D. As earlier on Feb 2012 & Aug 2012, RBI through it Monetary policy
and Circulars have been trying to address the issue of unhedged
positions. Extract : " it has been decided that banks, while extending
fund based and non-fund based credit facilities to corporates, should
rigorously evaluate the risks arising out of unhedged foreign currency
exposure of the corporates and price them in the credit risk premium.
Further, banks may also consider stipulating a limit on unhedged
position of corporates on the basis of banks Board approved policy"

E. At last even after assuming hedging cost at 7% (as per your article
at 6 or 6.5%) it will still help importer reduce their cost by around
3% against using cash credit. Thus, Importer needs to be further
educated on using any product linked to foreign currency (including
Buyers Credit) with hedging.
from: Sanjay Mandavia
Posted on: Sep 14, 2013 at 12:08 IST
I would like to disagree.
A. It is not just Indian currency which has seen weakening against
dollar but overall same trend has been seen for currency of other
developing economies.
B. Above article has been trying to blame it on Buyer's Credit (short
term finance) for currency depreciation, thus diverting from original
issue that current problem is mainly because of Current Account
C. RBI had delegated to AD (Bank) right to approve should term credit
and tenure maximum upto 360 for import of raw material. Thus there was
no blanket approval for 360 days, banks based on their internal
methodology decided on tenure.
from: Sanjay Mandavia
Posted on: Sep 14, 2013 at 12:07 IST
Indians have the great habit of abusing every beneficial facility until it collapses and
explodes to the detriment of everyone - including the other innocent Indians. If buyer's
credit is available on attractive terms, it should be used for the specific purpose and should
not be overstretched to its limits and jeopardizing the whole system. Okay. Let these greedy
importers suffer by paying exorbitant amounts when the buyer's credit become due on 30
September 2013 or 31 March 2014. The resulting avalanche will not only hit these greedy
importers but all the others will suffer. But the RBI should have stepped it long ago in
preventing this practice to go overboard - knowing the Indians very well. The commercial
banks must be penalized heavily for abetting this along with the reckless importers.

This how the sand mafia, coal mafia, oil mafia, land mafia, forest mafia, and all other
unknown mafias in our great country make short term gains leading to long term
catastrophe. Jai Hind!
from: N.Chakrappani
Posted on: Sep 14, 2013 at 11:12 IST