Firms may raise more funds abroad

Overseas funding is becoming more attractive for Indian companies with the cost of borrowing dollars falling to record lows.

The interbank cost of borrowing dollars for three months fell to yet another record low on Thursday, according to the latest report by the British Bankers’ Association.

The three-month London Inter-Bank Offered Rate (Libor) for dollars was fixed at an all-time low of 0.26656 per cent. The equivalent euro rate was set slightly higher, while the sterling rate remained unchanged.

The six-month Libor, which is the benchmark used by the Reserve Bank of India for external commercial borrowings (ECBs), was at 0.49 per cent, the lowest in several months. The Indian central bank allows local companies to add other costs up to a specified level while going for ECBs.

 

The spread on three-month Libor over the overnight index swap rates for dollars widened 2 basis points to 15 basis points. The spread expresses the three-month premium paid over anticipated central bank rates or overnight index swap rates and is seen as a gauge of banks’ willingness to lend to each other. A wider spread is seen as an indication of decreased inclination to lend.

Bankers said that the low interest rate and the declining spreads on credit default swaps would aid Indian companies tap overseas markets.

“Along with low benchmark (Libor), the spread that Indian companies and banks have to pay is falling in the international market. Our sense is that spreads will come down further,” said a senior executive at State Bank of India.

“This is an opportunity to raise cheap funds. It is already evident from amounts raised and plans spelled out by large Indian companies. This trend may become broad,” the executive added.

“More Indian firms will look to raise money overseas. However, this will not affect domestic credit growth significantly. Although Libor rates are low, the appetite among foreign banks is also low. So, Indian firms looking to raise loans abroad will mostly have to borrow from overseas branches of Indian banks,” said Parthasarthi Mukherjee, president (credit) at Axis Bank.

A host of Indian companies are looking at ECB and the pipeline which had virtually dried up after the global financial crisis in September 2008. According to the latest RBI data, during the first half of the current financial year, ECB flows were estimated at $6.97 billion, as against $10.22 billion during April-September 2008, representing a decline of 31.8 per cent.

An executive at a foreign bank said that companies would take the final call after factoring in various other costs. “It is a case-by-case decision. You need to add the swap rate, the credit spread, the cost of hedging and then compare it with the cost of borrowing in rupees. In addition, for companies, there is also the issue of withholding tax,” he added.

“There is appetite among foreign investors for small-sized bilateral and club deals and the pricing is favourable. However, there is little appetite for full-fledged syndicated deals, and I don’t see that coming back before next year,” added Nishikant Das, director, debt capital markets at Standard Chartered Bank.