The Rupee’s Fall Hurts Exporters

Under normal circumstances, when your local currency drops, this helps drive exports as the price of your goods overseas is reduced to foreign buyers. This is not the case unfolding in India this week.

The Rupee has fallen by 15-18% this year.

Unfortunately, too many exporters and businesses have borrowed cheap foreign dollars to cover working and capital expenses, never expecting the huge drop in local currency. The strong dollar gain against the INR, has forced financial institutions and lenders to reevaluate their foreign currency loans.

The re-evaluation has actually inhibited exporters from exchanging their export bills with the banks which are using the same to reduce the speculative excess in authorized working capital lines as the funds are processed. Due to the lack of funds during the high season, exporters who get payments from their overseas buyers with a time lag chance to lose business, apart from not being able to pay creditors or meet other expenses on time. It is a vicious cycle exporters have fallen into. As local currency declines in value, the exporter cannot adjust his previously committed sales, which have been booked in foreign currency that has kept its value. It is locally that the exporter feels the crunch, as he needs to purchase foreign materials to make his production quotas. In the past the exporter could hold foreign dollars and use these to import his suppliers and equipment.

With this re-evaluation and the reduced credit lines being made available by the banks, as soon as the exporter uses the bank to process his documents, the bank is taking reducing their payments by the re-evaluated payment due the bank. The exporter is then left short of working capital and at the same time, paying the bank in depressed currency levels.

A representative of a large bank stated that accounting standards require us to adjust incoming realization of export proceeds fully towards the regularization of any notional excess and until this comes within the rupee limit we are unable to disburse fresh advance towards export bills. Foreign currency accounting standards require a revaluation of exporters’ forex currency loans on a periodic basis by banks.

An example would be, “if a diamond company has a working capital limit of 4,000 and one dollar buys   40, it can borrow the equivalent of $100-$50 (2,000) for rough diamond imports or pre-shipment credit, and $50 (2,000) as post-shipment credit, which essentially entails the exporter getting bills drawn on overseas buyers discounted by a bank. However, in the interim, if the rupee weakens to, say, 50, the bank deems the working capital to have notionally exceeded its sanctioned limit by 25% or 1,000. “(_{Economic times)}

“Consequently, instead of discounting an export bill of, say $10, drawn on one of the company’s overseas buyers, the bank adjusts it against the notional excess of 1000. Even after the $10 realization is adjusted towards the excess, a notional excess of 500 still exists. If the rupee remains constant at 50 to the dollar, the next bill of $10 is also not discounted, leaving the exporter strapped for funds still longer.

If the local unit falls below 50, the bank keeps adjusting the receivables towards reducing the excess, leaving no funds for the exporter to meet creditor obligations, staff and factory expenses, etc. Till the notional excess is not adjusted completely, the company cannot get fresh loans against export bills, bringing its business cycle to a stand-still.”

Regardless of the accounting, this re-evaluation leaves the exporter without the necessary cash flow to operate their business. This drop in the value of the rupee is thus hurting the overall economy of India, combined with the recent drop in GDP and fall in retail sales, India is facing tough times.