The Reserve Bank of India (RBI) will offer swap arrangement of $2 billion, both in foreign currency and Indian rupee, for member countries of the South Asia Regional Cooperation (SAARC), with a view to strengthening regional financial and economic cooperation. RBI governor D Subbarao made this announcement at the 24th SAARC Central Bank Governors' Meeting, in Pokhara, Nepal today.

The facility will be available to all SAARC member countries, viz, Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. Member countries can now approach Reserve Bank of India for availing of the facility.

The swap will be offered in US dollar, euro or Indian rupee against the domestic currency or domestic currency denominated government securities of the requesting country. India will contribute the entire $2 billion corpus of the SAARC swap arrangement.

The swap amount available to various member central banks has been arrived at broadly based on two months' import cover subject to a floor of $100 million and a maximum of $400 million per country, RBI said in a release.

Under the facility, the requesting member countries can make drawals in US dollar, euro or Indian rupee in multiple tranches. Each drawal is of three months tenor and can be rolled over twice.

The first rollover will be at the normal rate of interest, while the second one attracts 50 bps interest more than the normal interest rate. For this purpose, the normal interest rate agreed upon is the LIBOR (for three months) plus 200 basis points. The normal interest rate for rupee swap is RBI repo rate minus 200 basis points, ie, 6 per cent. (RBI has kept the repo rate at 8 per cent).

For availing of the facility, the central banks of requesting countries will have to enter bilateral swap agreements, which need final approval from the government of India. The RBI's proposal to offer swap facility to SAARC member countries had earlier been approved by the union cabinet.

The Swap Arrangement is intended to provide a back stop line of funding for the SAARC member countries to meet any balance of payments and liquidity crises, till longer term arrangements are made or if there is a need for short-term liquidity due to market turbulence, the release said.

The decision to create a SAARC Swap facility was taken at the SAARC finance ministers meeting on global financial crisis, held on 28 February 2009.

''A major cause of current concern in the region is the drying up of credit and the contraction of financial markets. Mechanisms must, therefore, be developed aimed at creating bilateral arrangements in the region to address short-term liquidity difficulties and to supplement international financing arrangements,'' the meeting had held.

It is expected that this swap facility will further economic cooperation within the SAARC region, pave the way for increased intra-regional trade, and contribute to enhancing our collective welfare, the RBI release added.