The Reserve Bank's directive, that all foreign exchange earners can maintain only 50 per cent of their inward forex remittances in Exchange Earner's Foreign Currency (EEFC) account (with the balance to be surrendered for conversion to rupee balances), is a very regressive step.
MSMEs are major contributors to India's exports; this is in spite of market slowdown, higher cost due to poor infrastructure, excessive transaction cost, among other things.
NO SPECULATION
Typically, the MSME's import their key raw materials, which could be 50-60 per cent of the cost of the product.
The imported raw material is normally a dollar-designated purchase and the MSMEs utilise their dollar earnings to pay for them so that there is no impact of fluctuation in foreign exchange on input costs. It must be noted the balances are retained only for a short period as the sales/purchase cycle is continuous.
Earnings in other currency such as pounds and euro are normally used for meeting overheads and other expenses of the company.
The balances remain in the EEFC account for a very short period, and MSMEs try to minimise the impact of exchange fluctuations by closely monitoring rates and transferring funds when there is no adverse impact. By the very nature of the size of transactions, MSME's do not indulge in currency speculations.
ALTERNATIVE FORMULA
The May 10 directive by RBI will cause great loss to the MSME sector. MSMEs do not have the skill to handle foreign exchange risk.
MSMEs will have face complications in accounting for the inward remittances and in booking actual values, due to two different methods for inward remittance credit. MSMEs may have to enter into forward contracts which are very expensive, time-consuming and complicated.
The system now introduced will result in increasing expenses because additional charges are incurred, once on 50 per cent being credited to the EEFC account, a second time on 50 per cent being converted to Indian rupees, and a third time when the EEFC account is utilised. The accounting system for MSMEs will become more complicated and time-consuming.
MSMEs should be completely exempt from this mandated requirement. Alternatively, the RBI can consider imposing a maximum ceiling which MSMEs can maintain in the EEFC accounts and amounts in excess of this can be converted to rupees.
The amount permitted could be up to $150,000 or euro or pounds in each account. MSMEs do not have the scale nor the ability to maintain large balances because of their small transaction size.
(The author is Managing Director, Taylor Rubber Pvt Ltd.)