Rush For Working Capital In Forex

Confirming the move, a senior banker in Mumbai said, "A number of blue-chip companies have moved the commercial banks for working capital loans in foreign currency as the dollar loan works out cheaper than the rupee loans. We are happy to oblige them as rupee advances are just not picking up."

The finance ministry recently allowed banks to start disbursing working capital in foreign currency. Until then, foreign currency loans were given to corporates to finance capital goods imports.

The corporates need to acquire the finance ministry's clearance to avail of the dollar loans with the maximum limit fixed at $ 3 million.

Unlike working capital loans denominated in rupee, the foreign currency working capital loans, which is a part of the maximum permissible bank finance (MPBF) for the corporates, are being extended for a period of three years.

"It makes sense to go for dollar loans as it works out cheaper," said the treasury head of a Mumbai-headquartered corporate house. The working capital dollar loans carry a floating interest rate, the maximum being 200 basis points over the six-month London inter-bank offered rate (Libor). In other words, the interest rate works out to 7.9 per cent since the six-month Libor rate is currently pegged at 5.9 per cent.

"Since the exposure is small, we do not need to take the cover. Considering the annual depreciation rate of rupee vis-a-vis dollar is five per cent, the effective interest rate works out to less than 13 per cent. Rupee loans, in contrast, cost between 17 and 18 per cent," the treasury head said.

When contacted, a senior executive of Bank of India -- which has a substantial FCNR-B accounts -- said corporates are evincing keen interest in the dollar loans. "We will extend working capital forex loans only to those corporates which are net foreign exchange earners," the BoI executive said. A State Bank of India official also confirmed the trend.

While an increasing number of corporates are accessing the cheaper dollar loans, the banks -- on their part -- are trying to arrest the decline in the credit offtake.

Between March 29 and August 16, deposits of all scheduled banks grew by Rs 20,719 crore while advances declined by Rs 1,802 crore. The credit-deposit ratio came down from 60.23 to 57.19.

In the corresponding period last year, deposits grew by Rs 2,586 crore and advances by Rs 1,863 crore and the CD ratio went up marginally from 56.82 to 56.92.

However, only those commercial banks, which have substantial chunk of FCNR (B) accounts, can disburse the working capital loans in foreign currency.

The State Bank of India has the largest overseas branch network followed by Bank of India, Bank of Baroda, and Canara Bank.

In 1995-96, when the liquidity crunch was at its worst, the financial institutions foisted foreign currency loans on corporates. However, they were offering term loans. In the case of corporates with no foreign exchange earnings, the dollar loans turned out to be costly debt as they had to bear the swap cost.

With the forward premia running high, even at 200 basis point over Libor, the cost of dollar loans turned out to be six to seven percentage points higher than rupee loans.