Global cash crunch hits banks

Foreign bankers charge Indian lenders overseas ‘liquidity premium’ .

Indian banks operating overseas have to grapple with additional pressure in the form of a “liquidity premium” being charged by foreign banks on fresh lines of credit extended for inter-bank transactions. The move comes at a time when the global liquidity crunch is not showing any signs of easing. The London Inter-Bank Offered Rate (Libor) touched an all-time high of 6.88 per cent yesterday.

TOUGH TIMES

The liquidity premium is over and above the risk capital premium and the own cost of funds

As a result of the premium, foreign offices of Indian banks have either been forced to stop rolling over short-term lines of credit or are passing on the additional cost to borrowers

As a result of the premium, foreign offices of Indian banks have either been forced to stop rolling over short-term lines of credit or are passing on the additional cost to borrowers. The liquidity premium is over and above the risk capital premium and the own cost of funds.

Libor is the international interest rate benchmark for banks giving foreign currency credit. With high volatility in international markets, foreign banks have virtually stopped using Libor as a benchmark, bankers said. This is because, being a polled rate, it is usually very high and banks have little say over the spread.

“In the present context, Libor has lost its significance as the benchmark rate and foreign banks are saying this very clearly now,” added an executive at a public sector bank.

Typically, banks raise money for their clients at a rate linked to Libor. The hedging charges are then added to it. With Libor rising, the cost has already gone up and the premium is making it even more expensive.

“They are (foreign banks) pricing the rates by factoring in the liquidity position. So, banks with decent ratings and proven track record have to pay not less than 300-400 basis points over the Libor for three-month funds,” added the treasury head of a mid-sized public sector bank. Even for Indian banks that do not have overseas operations, but extend packing credit to exporters, the cost has gone up and the same is being passed on.

“With Libor fluctuating like never before and very little inter-bank transaction happening in the overseas market, banks are finding it more relevant to benchmark their rates in accordance with their own risk analysis,” said a banker.

Similarly, banks are not rolling over their short-term credit to companies overseas. “The market is stressed from liquidity. Even if the regulators are injecting funds, banks are not showing any signs of passing it on, so we are not rolling over the short-term credit,” said a treasury head of a large public sector bank.

Banks, which are still rolling over existing credit lines, also said they will feel the pinch. “Till now, we have been rolling over a majority of the credit lines, but going forward, rolling over would be painful,” said Axis Bank Treasury Head Partha Mukherjee.