The Dubai crisis may increase the cost of funds for India companies, particularly those with business interests in West Asia.
Credit risk spreads, reflecting a premium over the benchmark lending rates that companies pay for credit, have moved up in the range of 10 to 18 basis points in the last few days.
Joiel Akilan, chief representative (India) of Spanish bank BBVA, said, “The developments in Dubai have made bankers cautious. They will put deals under the magnifying glass. It will impact the way lender price loans.”
The premium that borrowers would have to pay over the London Inter Bank Offered Rate (Libor) have not, however, shot up the way they did a year ago when spreads had jumped 750 basis points for some Indian companies in the aftermath of the collapse of Lehman Brothers.
SPREADING CONCERN
Credit Default Swap Spread
25-Nov
26-Nov
27-Nov
30-Nov
ICICI Bank
189.40
195.96
206.29
196.50
Reliance Industries
151.32
153.62
154.70
154.20
SBI
118.20
121.36
129.66
125.71
Tata Motors
574.60
574.60
574.60
594.50
Tata Steel
643.14
652.43
654.86
647.60
Corporate securities in USD for 5 yearsSource: Bloomberg
The head of treasury with a large Indian bank with branches in West Asia said the situation was evolving and the market was influenced by uncertainty. Although there was no panic, the long holidays in Dubai added to the discomfort.
This was reflected in the rise in risk spreads, he said.
Global rating agencies S&P and Moody's have downgraded the credit ratings for several government-related entities in Dubai. The implications are likely to keep the market on tenterhooks and provide direction to the market risk appetite in the near-term.
A senior State Bank of India official said the risk associated with Indian papers may also go up. A large number of Indians work in Dubai and United Arab Emirates and Indian companies also have exposure due to investment or project business, factors that would increase funding costs going forward. A clearer picture will emerge in 10 or 15 days, he added.
In a note, ING Vysya Bank said though the initial fright in the market has eased, the market was likely to remain cautious in the near term. Credit rating downgrades at places might impact the debt-raising capacity of certain companies.
Rating agency ICRA has downgraded the rating to loans extended to DP World’s (a transport and logistics arm of Dubai World) two containers terminals – Chennai and Nhava Sheva.
Senior executives with public sector and foreign banks said while the cost of funds could go up, the rise would not be substantial and was not expected to hamper the flow of funds to India, they said.
1. Dubai World is a government company and despite the latest news that government has ditatched responsibility for debt repayment and restructuring; it has, it is and will affect world economies in the next year as well. News is spurred already about thousands of job losses in UAE with Indians abandoning their cars at airports and leaving the arab nation.
2. UAE's investment in India should be carefully selected and analyzed. It is high time for corporate officers and government officials to stop being greedy for foreign investments, accepting bribes/unofficial payments to grant licenses to companies of troubled as well as capitalistic economies such as China and UAE. These actions will at the end affect our nations strong economic foundation and, create a ripple affect which will ultimately lead a downfall. The reason being that these economies are not transparent in their nature and financial information presented is not fair to the stakeholders.
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