Working capital-hit oil firms rush to raise bank funds

Oil companies are rushing to raise both rupee and dollar loans from commercial banks as rising international crude prices and rigid local prices cramp their working capital resources.

Aggravating matters is the fact that oil companies have to share the subsidy burden of liquefied petroleum gas (LPG) and superior kerosene oil (SKO).

Also, oil companies are preferring to stock up crude oil due to the prevailing uncertainties.

This is good news for commercial banks, a section of which are streching out their lines of credit to meet the dollar demand.

So much so, bankers said business from oil companies could make up for most part of the pick up in non-food credit.

The credit given to oil companies is usually for three to six months carrying a daily put and call option so that the loan could be raised depending on the volatility in the international oil market and rupee-dollar exchange rate.

Banks which were earlier unwilling to roll over short-term lines of credit due to unavailability of dollar are happily rolling over the facility now.

This is because surplus dollar funds parked in the international money market is fetching less returns with declining yields in the US market. In dollar-denominated loans, these coporates are using buyer's credit and external commercial borrowings.

With the RBI capping the buyer's credit rate at 50 basis points over London inter-bank offered rate (Libor), dollar funds have become cheap for them. Libor is the international benchmark for foreign currency loans and currently ruling at 1.9 per cent for six months.

Crude prices crossed $49 per barrel last month. Since then, they have come down a tad but the prices may go up again as the US has started stocking oil at the onset of winter. "Even if the crude prices have gone down now, the overall outlook is towards an uptrend," said a banker.

Banks are willing to lend in dollars as most of them are surplus with dollar funds. Earlier, they banks were hesitant to roll over the lines of credit as most of the dollars borrowed from the Indian banks were converted into rupee funds to take advantage of the arbitrage opportunity in India and international market.

This was possible as both Libor and forward premia were ruling at a unusually low level. However, both Libor and the forward premia are ruling high now and the arbitrage opportunity does not exist any more. Therefore, there is no problem in funding these corporates, said a banker.

Oil companies normally do not have the capacity to store large amount of crude or processed oil/petroleum products as there are no large storage capacities. All the three oil PSUs "" IOC, BPCL and HPCL "" put together can stock less than even a months crude and product requirement.

However, they do not have any outer limit for stocking oil. Every company has its own limit approved by the board and the actual stock epends on each company's liquidity level. During the NDA regime, the oil ministry perceived 40 days stock as a comfortable level but there is no codified policy on this matter.