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Poornima Mohandas

MUMBAI, Nov. 26

SECURITIES Trading Corporation of India, a large primary dealer in the g-secs market, has started tapping a new source of funds, loans against foreign currency deposits (FCNR deposits).

With primary dealers, conventionally borrowers, slowly being phased out of the call money market, "we need alternative sources of funding," said a senior official in Securities Trading Corporation of India Ltd (STCI).

Several Primary Dealers (PDs), especially the ones with high net worth and the foreign ones, adept in the forex market, are keen on this new route for funding their assets, as more limits are being imposed in the call money market, as part of the slow phasing out of non-banking players from the call market.

"The foreign currency loans taken by STCI were used for asset building purposes, mainly non-SLR (non-Statutory Liquidity Ratio bonds/papers, which includes commercial papers, corporate bonds, debentures and so on) and also government securities,'' said the official.

According to market sources, STCI took a loan of close to Rs 100-crore from SBI at a rate of LIBOR plus 60 basis points with intentions to keep its positions unhedged, banking on the appreciating rupee. These loans taken for short terms of 3-6 months are at LIBOR-linked rates. With the LIBOR dipping, rupee remaining stable and better still appreciating and the forward premia falling, this makes cost-effective funding for PDs.

Through this route, a PD can take a loan in dollars, from a bank against an FCNR deposit, convert it into rupees at the reigning foreign exchange rate and use it to fund buying of securities in the market.

There is a `foreign exchange risk' involved for repayment of the loan in dollars. Therefore, the borrower can hedge the positions, by buying forward covers.

Taking a view on the currency for a month, the borrower can either leave the whole loan completely unhedged, i.e., if one foresees falling premia and appreciating rupee. Alternatively, the position can also be partially or fully hedged, depending on one's view on the exchange rate.

STCI official said, "RBI has been kept informed about the foreign currency loans."

In a meeting of primary dealers with the RBI, the option of foreign currency loans had been discussed. In an attempt to contain the foreign exchange risks involved, the RBI is expected to introduce capital adequacy norms or a cap on lending linked to the net worth of the PD.

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