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Corporate - Overseas Borrowings


ECB losing appeal for corporates

C . Shivkumar

Bangalore , Dec. 16

WITH international interest rates on the ascent, corporate interest in foreign currency loans has considerably waned.

Banking sources said that since the beginning of this month few corporates or banks have approached the external commercial borrowing (ECB) markets. Till September this year, most corporates had preferred the ECB route for raising debt funds.

Also few corporates were opting for foreign currency loans from domestic financial institutions or banks, the sources said. This was despite the weakening of the dollar against the Indian rupee. The rupee has since October gained at least 4.5 per cent against the dollar.

Bankers said that one of the reasons for the loss of interest in ECBs was the increased cost of raising funds in foreign currency and anticipation that costs would further rise in the coming months. Currently, after the hike in the US Fed Funds rate, the rate at which overnight funds are borrowed by eligible institutions, now stand at 1.75 per cent.

Six month London Interbank offered rates have also moved up close to 3 per cent. This would now mean that for the Indian institutions/corporates, the borrowing costs would be at least 4.5 per cent assuming a spread of 150 basis point over LIBOR.

Inclusive of hedging and incidental costs, the effective rates for ECBs would be in the region of at least 7.5 per cent, bankers said.

Although on the face of it, this rate would appear cheap as against domestic lending rates, few corporates are interested. One of the reasons for this lack of interest is that ECBs are mostly floating rate loans.

Accordingly with the international markets tightening, few corporates were prepared to assume the upside risks, bankers said.

Given the hardening trend in the international markets, few were prepared to leave their positions open, unlike in the recent past. This was despite the strong foreign exchange inflows.

Leaving an exposure unhedged would only take place if the exchange rates were expected to strengthen further in the coming weeks. Few anticipate that to happen, bankers said.

The fear of leaving exposures unhedged was on account of the quality of inflows taking place into the markets, bankers said.

Bulk of the foreign exchange inflows into the domestic markets during the last two months were in the form of volatile capital account transactions, particularly from foreign institutional investors. Close to $8 billion had flowed into the market through this route during the last two months. As a result, several domestic corporates were opting for borrowing in rupees. This was because the funds were available for long terms at fixed rates unlike ECBs. Bankers said that this shift in turn was driving the non-food credit offtake.

Non-food credit offtake has increased by about 8 per cent from October this year.

Bankers said that some of this credit was also driven by corporates, opting for refinancing some of their existing floating rate foreign currency loans and substituting the same with fixed rate rupee denominated loans.

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