What changed
Previously, interest rates on export credit in foreign currency were regulated by RBI. With effect from May 5, 2012, banks are now free to determine these rates themselves, as per the directive issued under Sections 21 and 35A of the Banking Regulation Act, 1949.
What it means for you
Banks gain full pricing freedom on foreign currency export loans, allowing them to compete more effectively and tailor rates to market conditions. This deregulation is expected to increase the flow of credit to exporters, as banks can offer more attractive terms. Lenders must now develop internal pricing models and risk assessment frameworks for these loans.
What you must do
- Update your bank's lending policy to reflect the new freedom to set interest rates on export credit in foreign currency.
- Develop or revise internal pricing models for foreign currency export loans, considering market rates and risk factors.
- Train credit and treasury teams on the deregulated framework and its implications for pricing and risk management.
- Communicate the change to exporters and relationship managers to leverage the flexibility for business growth.
Who it affects
All scheduled commercial banks (excluding RRBs) offering export credit in foreign currency, Exporters availing foreign currency export credit, Bank treasury and credit departments
From when does this deregulation take effect?
The deregulation is effective from May 5, 2012, as per the RBI directive dated May 4, 2012.
Does this apply to all types of export credit?
This circular specifically applies to export credit denominated in foreign currency. Domestic currency export credit may be governed by separate regulations.
What legal authority does RBI use for this change?
RBI issued this directive under Sections 21 and 35A of the Banking Regulation Act, 1949, which empower it to regulate interest rates and ensure public interest.