Blue-Chips Go In For Step-Up Forex Loans

In the step-up interest structure, the seven year average maturity of forex loans are divided into three parts with the interest rate for the first three years of repayment pegged at the lowest.

The rate is stepped up in the next stage on fourth and fifth years and the maximum rate is charged at the last leg -- the sixth and seventh years.

Cash-rich corporates, confident of being able to pre-pay the forex loans before the maturity, are rushing in for the step-up structure since it will help them save on interest outgo. There is also a growing feeling that a buoyant balance of payment situation may prompt the government to reduce the average life of forex loans for corporates from the current stipulation of seven years to five years.

 

At present, only the financial institutions are allowed to raise five-year forex loans.

Anticipating that they will be allowed to raise five-year dollar loans in the future, companies are opting for the new mechanism. Driven by intense competition, bankers have virtually waived the penalty clause on the pre-payment option. "All we want is a 30-day notice after the interest roll-over," a banker said.

The Bank of Nova Scotia kicked off the step-up interest rate forex loan, syndicating $75 million to Telco at an all-in cost of 102 basis points over Libor.

The State Bank of India, a late entrant in a market dominated by foreign bank like ANZ Grindlays, Chase Manhattan and Citibank, is currently in the process of arranging a $115 million forex loan for L&T with a step-up interest rate mechanism. ANZ Grindlays and Sumitomo are the other members of the syndicate.

The SBIbeginning. The prepayments also enable banks to build short-term assets.