What changed
The ceiling rate on export credit in foreign currency was reduced from LIBOR plus 350 basis points to LIBOR plus 200 basis points. For lines of credit with overseas banks, the ceiling was cut from six-month LIBOR/EURO LIBOR/EURIBOR plus 150 bps to plus 100 bps. These changes apply only to new advances, not existing ones.
What it means for you
Banks must immediately lower their lending rates on foreign currency export credit to the new caps, which will reduce borrowing costs for exporters. The prohibition on additional charges (service, management fees) except out-of-pocket expenses tightens banks' ability to recover costs. This could compress margins on export credit portfolios, especially for banks with significant foreign currency lending.
What you must do
- Update your bank's interest rate schedules for foreign currency export credit to reflect the new ceiling of LIBOR + 200 bps for pre-shipment and post-shipment credit up to 180/360 days.
- Ensure no additional charges (service, management, etc.) are levied on these advances; only out-of-pocket expenses may be recovered.
- Adjust rates on lines of credit with overseas banks to the new ceiling of six-month LIBOR/EURO LIBOR/EURIBOR + 100 bps.
- Communicate the revised rates to all branches and trade finance desks, and apply them only to fresh advances from February 19, 2010.
Who it affects
All scheduled commercial banks offering foreign currency export credit, Exporters availing pre-shipment or post-shipment credit in foreign currency, Banks with lines of credit with overseas banks
Does this circular apply to existing export credit facilities?
No, the revision in interest rates is applicable only to fresh advances made on or after February 19, 2010.
Can banks charge any fees other than interest on these loans?
No, banks cannot levy service charges, management charges, or similar fees. Only recovery of out-of-pocket expenses incurred is permitted.
What benchmark rates are used for these ceilings?
The ceilings are based on LIBOR, EURO LIBOR, or EURIBOR, as applicable. For lines of credit with overseas banks, the benchmark is six-month LIBOR/EURO LIBOR/EURIBOR.