RBI’s recent move to raise export credit refinance limits – an analysis

I should have expanded on this measure at the time of RBI decision.

In its mid-quarter policy on Jun-12, RBI increased the limit of export credit refinance facility from 15% to 50%. This was listed as a measure to augment liquidity conditions:

 To further augment liquidity and encourage banks to increase credit flow  to the export sector, the Reserve Bank has increased the limit of export credit refinance (ECR) from 15 per cent of outstanding export credit of banks to 50 per cent, which will potentially release additionally liquidity of over  Rs. 300 billion, equivalent  to about 50 basis points  reduction in the CRR.

This is to be become applicable from 3-Jun-12 onwards.

What does one mean by ECR (see this RBI master circular for details)? Say a bank has given a export credit for Rs 100. And now suppose it needs liquidity. It can then choose to goto RBI and borrow money via this ECR route. It will give RBI the  Demand Promissory Note (DPN) as collateral (read circular for more details). It will then get Rs 15 as  refinance. This has now been increased to Rs 50. So banks can then avail this facility to shore their liquidity needs. This is just another RBI window ti get liquidity barring the usual repo etc.

RBI releases the export credit refinance data in its monthly bulletin and also in daily Money Market Operations.

The latest monthly bulletin of Jun-12 shows ECR data till Apr-12. It shows in Apr-12, of a total limit of Rs 13350 Cr Commercial Banks availed only Rs 3970 Cr. This is just about 30% usage of the earlier 15% limit. However, one does see in some months esp. Mar the  ECR volume does rise. Overall the facility is unused for most of the time. ECR  was even increased to 50% during 2008 crisis but was hardly used.

For more latest figures, we need to see MMO (which is released in the morning for previous day operations).In each MMO, there is a column which gives the details. hence on 26 Jun, 2012 we get:

	Amount Outstanding (in Rs Cr)	Rate
E. Standing Liquidity Facility Availed from RBI	9618.66	8
of which
Special Refinance Facility ^	2805.24

Standing Liquidity Facility Availed from RBI includes refinancing by all – Banks, Primary Dealers etc. It also includes refinancing by Exim Bank which is given separately as Special Refinance Facility.

So on 26-Jun-12,  around Rs 6800 (9600 – 2800) Cr is availed by all the other entities. Even assuming all 6800 Cr is used by SCBs, we are still likely to be short of Apr-12 ECR limit. It is likely that Export credit must have risen in the period, so the short fall is even higher.

Keeping these nos game aside, the real q is why banks do not use this facility? Good friend Nitesh Ranjan, an econ at Union bank pointed couple of reasons:

• Asymmetric distribution of banks having high ECR eligibility and banks having liquidity shortage. For example, if SBI which supposedly should have very high ECR eligibility is not a borrower in the market, it will not utilize ECR facility. Similarly a bank having liquidity shortage may have limited access to ECR due to its book size of eligible export credit.
• Restrictions on usage of funds availed through refinance facility. These funds can only be used for export finance purposes. So does not really help banks immediately like Repo etc. 

The first reason could be the most important and logical as well. I would also like to add this:

• Taking ECR facility is cumbersome compared to repo borrowing.  ECR is a thing of the past when refinancing/discounting etc was used. Banks rely more on LAF/Money markets for liquidity these days..

What else? I will try and add more on this space later as and when I can get more probable reasons..

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