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Govt tapping overseas market to retire dollar loan

Shaji Vikraman

NEW DELHI, Feb. 10

THE Government is on course to carrying out its first overseas market borrowing aggregating over $100 million in the form of refinancing of a clutch of foreign currency bilateral loans.

State Bank of India has been mandated to carry out the refinancing deal, which involves replacing part of the relatively costly bilateral loan denominated in US dollars with a cheaper loan in the Japanese yen, according to officials.

The deal is expected to be completed during the next few months. The Reserve Bank of India has already given an in-principle approval for the refinancing and prepayment of external debt, according to senior Government officials.

India is one of the few countries which has refrained so far from floating a sovereign bond.

The current refinancing proposal does not fall in that category as it signals only the substitution of an existing loan.

The Resurgent India Bonds and the India Millennium Deposits floated by SBI are categorised as external commercial borrowings.

Given India's credit rating, expectations are that the spread over the six-month Libor on the deal could top the 100 basis points mark.

The Government stands to gain through this attempt, as the average cost of some of the borrowings contracted from multilateral and bilateral agencies was at rates close to seven per cent.

If the average annual depreciation of close to nine per cent of the rupee against the US dollar during the last decade is also taken into account, these borrowings assume a very expensive nature.

The majority of the loans have an original maturity of close to 20 years.

The residual maturity of some of the loans that are being refinanced varies from five to 10 years.

Besides gains in the form of a cheaper loan on its books, refinancing offers the advantage of not altering the maturity structure of the country's external debt.

The maturity structure of the country's external debt, which aggregated $100.4 billion in 2001, is skewed in favour of medium and long-term debt.

Depending on the response to the refinancing deal, the Government may opt to take the refinance route more often.

The soft interest rate regime in existence internationally offers a good opportunity for extinguishing costly debt and replacing the external debt portfolio with relatively cheaper debt.

Although the Government has not exercised this option, of substituting expensive debt with cheaper borrowings, corporates have been active on this front.

Refinancing of external commercial borrowings is now on the automatic route.

The Finance Ministry has already firmed up plans to prepay up to $1 billion of the external debt, taking into account the cost of carrying on its books relatively high cost debt contracted from the World Bank.

However, since last year, both World Bank and Asian Development Bank have shifted from the pool-based currency system of lending to pricing the loans linked to the six-month Libor.

This was done after borrowers started resisting the higher rates and also to boost lending which was tapering off, according to officials.

With the six-month Libor now being well below 1.9 per cent, even after adding the spread of 60 basis points, the difference from the earlier multi-currency pool based rates and the current pricing works out to close to four per cent.

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