NBFCs' foreign lenders face repayment risks as US dollar becomes stronger

Covid has caused disruption in the domestic and global markets, enhancing the risk of default from the rise in cost of repayments due to upheavals in the currency markets

Foreign lenders having exposure to Indian finance companies and housing finance firms face the challenge of loan servicing of some of these firms as the dollar has become stronger against the rupee.

Also, lack of clarity on moratorium on payment for money raised through external commercial borrowings (ECBs) has created uncertainty.

While benchmark interest rates all over the world have declined, the dollar has strengthened against various currencies, including the rupee. 

This would mean the borrowers of foreign banks will have to cough up more rupees to buy one dollar, increasing the debt servicing cost.

Taking benefit of low interest rates, Indian finance and housing finance firms had raised money abroad through various instruments.

Now, the market and business climate has changed beyond recognition, giving rise to payment risks, said the managing director of a Mumbai-based non-banking finance company (NBFC).

The chief executive of a foreign bank said Covid-19 has triggered a severe disruption in domestic and global markets. This has enhanced the risk of default from rise in cost of repayments due to upheavals in the currency markets. 

The cash flows will be adversely affected due to severe demand destruction in India. Referring to the issue of granting moratorium to NBFCs (as borrowers), he said,  “The Reserve Bank of India (RBI) never restricted us (banks) from granting such leeway within its package announced on March 27. It will be case-to-case decision.”

Better-rated companies, including financial sector players, have raised substantial amounts in the last 12 months. They have liquidity to continue to maintain repayment discipline.

Taranjit Jaswal, head of corporate banking, Barclays Bank, India, said many NBFCs have conveyed that they would not like to use moratorium. The bank is keeping a close watch on three sectors - oil and gas, auto and NBFCs for their requirements.   

Another British lender Standard Chartered Bank, in a statement, said it has set up a global Covid-19 fund of $1 billion.  This is specifically for providing loans, import/export financing and working capital at preferential rates, for companies providing goods and services to help in the fight against Covid-19. It would also be used to support those re-deploying production resources to help fight this pandemic, said Standard Chartered Bank.

Similarly, Deutsche Bank, in statement, said the bank was in constant touch with clients to support them with their liquidity and risk advisory requirements during this period. 

The bank said it remains committed to extending all possible assistance to its clients and customers to help them ride out the current crisis.