What changed
The ceiling interest rate on export credit in foreign currency was increased by 25 basis points, from LIBOR plus 75 basis points to LIBOR plus 100 basis points. This change applies to both pre-shipment and post-shipment credit, and also to cases where EURO LIBOR or EURIBOR is used as the benchmark. The revision is effective from April 18, 2006, and covers both new and existing advances for their remaining tenure.
What it means for you
Banks can now charge exporters up to 100 bps over LIBOR for foreign currency export credit, up from 75 bps, giving them slightly more room to price risk and cover costs. For co-operative banks, this means higher potential interest income on export credit portfolios, but also a need to reassess pricing strategies to remain competitive. Existing borrowers will see their rates increase for the remaining loan period, which could impact their cost of funds.
What you must do
- Update your bank's lending rate schedules for foreign currency export credit to reflect the new ceiling of LIBOR + 100 bps.
- Communicate the revised rates to all branches handling export credit, ensuring compliance from April 18, 2006.
- Review existing export credit advances and adjust interest rates for the remaining period as per the directive.
- Train staff on the updated pricing for pre-shipment and post-shipment credit in foreign currency.
Who it affects
Co-operative banks offering export credit in foreign currency, Exporters availing pre-shipment or post-shipment credit in foreign currency, Treasury and credit departments of co-operative banks
Does this change apply to existing export credit advances?
Yes, the revision applies to both fresh advances and existing advances for the remaining period of the loan, effective from April 18, 2006.
What benchmarks are affected besides LIBOR?
The directive also covers cases where EURO LIBOR or EURIBOR is used as the benchmark, with similar changes to the ceiling rate.
Are there any exceptions to the new ceiling?
For Export Credit Not Otherwise Specified (ECNOS), banks are free to decide rates based on rupee credit rates, PLR, and spread guidelines, not subject to the LIBOR ceiling.