The Hindu Business Line : Borrowing spree in the offshore turf

AS one more measure of feel-good, it can be said that Indian offshore loan market has performed well, going by the latest statistics culled from Basis Point Annual, 2004 (www.basispoint.net).

This, in spite of a dismal performance by the Asia-Pacific's volume during 2003, with loan volumes hitting their "lowest point since the regional financial crisis of 1998-99."

Compared to the five-year low that India hit in 2002, registering only $1.7 billion as offshore loan volume, 2003 rose to $2 billion, with State Bank of India leading as the top-tier arranger, registering a volume of $235 million in a total of eight deals.

That is the only Indian name you can see in the table.

What have been the reasons for the turnaround? "Both market-driven and regulatory," notes the report. Yet, there were currents that worked in the opposite direction, in the form of tax laws and the central bank's policy. "Up until 2003, India's offshore loan market had been declining since 2000 - a drop that was exacerbated by the introduction of the withholding tax law in 2001."

It goes on to explain that tax deduction at source charged for offshore loans dampened foreign banks' interest in Indian loans, and steered Indian companies "to raise funds in the rupee bond market instead."

The other factor that worked against the tide of offshore loans was the imposition of restrictions by the Reserve Bank of India "to stem the inflow of foreign currency into India." Size limitations on external commercial borrowings (ECBs) "stunted the offshore volume in the first half." In this, there has been relaxation, in the form of "automatic approval for all ECBs by Indian corporates of up to $500 million."

Things started changing midway 2003, when "swap rates became more attractive, making it more cost-effective for Indian companies to raise dollars offshore and then swap into rupees than by simply funding in the local currency."

Lenders were predominantly from the West Asia, Taiwan and Thailand, apart from "traditional lenders from Europe and North America," reports Basis Point.

The recent upgrade of India's long-term foreign currency to `investment-grade status' by Moody's "has bolstered the hopes of some bankers that 2004 will be another buoyant year for Indian offshore loans."

The report notes with concern, however, the hesitation of Standard & Poor's to give a better grading for India, and also the taboo imposed by the RBI on the financial sector in accessing offshore funds.

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