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Poornima Mohandas

Though dollars are available for buying in the forex markets, banks only desire to borrow it, since otherwise they would expose themselves to an exchange rate risk. Banks have been raising dollars in plenty from the inter-bank swap route off late, "but that is also becoming unviable with the interest rates zooming.

MUMBAI, May 5

WITH increasing demand for foreign currency loans from corporates, banks are asking for dollar refinance facility from the apex bank.

"The Reserve Bank of India can lend dollars from its burgeoning forex reserves to banks who are scurrying to borrow dollars in today's scenario,'' said the treasury head of a private sector bank.

This could work as a win-win situation, according to bankers. "The dollars could be lent out by RBI at 100 basis points above the LIBOR (London Inter Bank Offered Rate) and would fetch better returns than it is doing at present,'' he added. The LIBOR for one year closed at 1.28 per cent on Friday.

The forex reserves are known to be invested in sovereign treasury bills and securities in overseas markets, which yield low returns with low interest rates prevailing worldwide. RBI dispenses refinance only in rupees at the moment towards export credit at six per cent; foreign currency refinance would indeed be a good and innovative idea, concede bankers.

Banks have been starved of greenbacks for months now with heavy demand for foreign currency loans from corporates. The demand stems from low interest rates on foreign currency loans. The going rate for FCNR loans is at 250-500 basis points above the LIBOR.

Most of the FCNR deposits had already been used up and some of it, located in overseas branches, were often inaccessible, said the treasury head of a nationalised bank. Though dollars are available for buying in the forex markets, banks only desire to borrow it, since otherwise they would expose themselves to an exchange rate risk.

Banks have been raising dollars in plenty from the inter-bank swap route off late, "but that is also becoming unviable with the interest rates zooming. With rising demand, the inter-bank swap route for borrowing dollars is going at 300 basis points above the LIBOR,'' said a senior bank official. However, RBI does not seem to favour the idea at least officially. Its official stand as mentioned in the Monetary and Credit Policy 2003-04 is that "there is no shortage of foreign currency availability in the market.''

To meet the demand for "borrowed dollars'', banks also suggested that the limit on foreign borrowings by them be upped from 25 per cent of Tier I capital at present. "Many banks have fully utilised this limit,'' said a forex analyst.

There have also been arguments to up the ceiling deposit rate on FCNR deposits to make them more attractive. At present, the ceiling on FCNR deposit rates is prescribed as low as 0.25 per cent below the LIBOR.

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