Adapting To Change

Government policy, at the time, sensibly positioned the FIs at the forefront of the re-entry into the foreign debt markets. It was correctly felt that FIs, exploiting their quasi-sovereign status together with their massive balance sheets would be ideal intermediaries. They would raise funds for five to seven years at attractive costs and then be able to pass them on to firms which do not have the market clout or financial strength to woo foreign lenders. This allowed the government to lengthen the profile of its external commercial debt.

But since then, the market has changed. Indian loans and paper are much more widely accepted by foreign banks. Most AAA and AA rated companies are able to raise money directly from international banks. Others like Reliance have gone beyond the traditional market and borrowed money for up to 100 years.

 

Medium and smaller corporates have also gained direct access to dollar funds because of the proliferation of foreign banks which have opened branches and representative offices in India in the past five years, all eager to increase asset allocations here and build relationships with the corporate sector. This process has been helped by the progressive relaxation in the policies governing ECBs, opening up many windows for borrowers like exporters where no prior clearances are required. All this has meant that both international and domestic banks have been able to extend small loans to the smaller corporates directly.

Hence, the FIs are no longer effective intermediaries in this market for the short and medium term tenures. The cost of dollar funds borrowed from them remains higher than when loans are directly contracted with banks. Equally important is the fact that lenders are willing to lend to the private sector for tenures of up to seven years.So by asking the FIs to redefine their external borrowing strategies, the government is ensuring that the private sector does not get crowded out of this market by the vast appetite of the institutions. It is also using the FIs as one weapon to extend the tenure of the country's external debt.

The FIs should have very little cause for complaint. Though there is still demand from some corporates for dollar debt from FIs, the institutions could start readying themselves for the impending boom in infrastructure finance by extending their liabilities' tenure. And while borrowing for periods of over 10 years or more may expose them to interest and exchange risks