The Hindu Business Line : ‘Textile exporters opted for derivatives to beat interest cost’

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‘Textile exporters opted for derivatives to beat interest cost’

G. Gurumurthy

Coimbatore, March 26 A good number of textile exporting companies in Coimbatore, Tirupur and Karur that have opted for cross currency swaps have done so using foreign exchange derivatives as a tool to bring down their cost of borrowing.

While it is not clear as to how many of them have made losses due to dollar depreciating against all currencies, including Swiss francs and Japanese yen, sources connected to the textile exporting companies maintain that their losses on account of forex derivatives may not come to surface unless they chose to book losses or set a short-term maturity term for their derivative contract.

The companies here have, according to them, gone for forex derivatives purely to save on their interest cost, namely to avail themselves of a reduced interest rate on their rupee term loan by converting it into foreign currency loan. Most of their currency swaps has been structured to suit this limited requirement only, the sources said. With not much of in-house or local expertise available to these companies for choosing newer financial products such as derivatives, the textile and garment companies preferred to go by their bankers’ guidance before they inked their contracts, they added.

When asked about the reports on textile exporters suffering losses on forex derivatives contract, the Tirupur Exporters Association President, Mr A. Sakthivel, said that he had not come across any incident involving the export houses in Tirupur region. The volume of forex borrowing under this route may not be big enough and even in low volume cases, he felt the exporters, who had opted for the window would have settled for restructuring the contract in time.

The revelation about the adverse financial implications, whether real or notional, on account of currency swap losses for these companies will largely depend on timing of the maturity of the derivatives contract. In the event of their contract being longer ones, these companies may escape the negative impact due to possible improvement in due course in the likely appreciation of dollar.

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