Short-term trade credit repayments, adding up to a massive $86 billion in 2013-14, could increase and result in an immediate outflow of dollars as companies opt to repay rather than refinance forex loans following the rupee’s sharp fall, bankers said.
Going by data, trade credit appears to have turned volatile. The growth of the outstanding stock of short-term trade credit has reduced to 7.3% in January-March from 8.3% in the previous quarter, indicating that repayments are increasing while fresh loans and rollovers have reduced.
“Buyer’s credit is on a decline; even rollovers of existing credit are falling,” said a senior official at Bank of Baroda (BoB). Nearly 54% of BoB’s international loan book is trade credit extended to importers. The public sector lender’s overseas loan book grew just 2% in April-June.
Trade credit — also called buyer’s credit and supplier’s credit — is accessed by importers through international banks and overseas branches of Indian banks. It is considered the most stable part of short-term debt and is easily rolled over.
Vivek Mhatre, who oversees international banking at Union Bank of India, said the rise in forward premiums is deterring companies from taking fresh forex loans. “People are somewhat apprehensive of taking fresh buyer’s credit because forward premiums have shot up,” said Mhatre. “Annualised hedging costs have increased from just 4% to as high as 8-9%. If you take forex loans, you have to hedge,” he added.
The cost of hedging future dollars has gone up after the rupee hit a fresh all-time low of 61.81 on Tuesday. The implied yield of a three-month dollar/rupee forward contract was 4-5% for most of 2012. Until May, the rate continued to be around 5% but since then, the implied yield of a 3-month forward contract has shot up to around 9%.
Another worrying factor that some analysts point to is the sharp rise in fresh trade credit taken in 2012-13 despite imports remaining largely flat sequentially. This, they believe, could add to repayment pressures if the credit is not rolled over. “In theory, the growth in buyer’s credit should match that of imports. So, if exports or imports are not growing, trade credit should not grow. Since it is growing, there is some speculation going on,” said Samiran Chakraborty, chief economist at Standard Chartered Bank. India’s imports shrank 4% in 2012-13 while buyers’ credit galloped over 20% in the same period.