Firms Wary Of Loans Against Fcnr Deposits

Oil firms have stayed off the market as they have taken loans to make remittances. The rupee depreciation, expected to take place as a result of oil majors hitting the spot market for dollars in the next one to three months, will increase the exchange rate risk on foreign currency borrowings, making the scheme relatively unattractive to the corporate sector, bank sources say.

Our oil prices have gone up. Hence, oil payments are likely to rise. This could lead to a substantial depreciation of the rupee. If this happens, there will be an impact on the forward cover. It could rise, causing the exchange risk on the corporate borrowing an FCNR loan, to go in for forward cover. This will raise the cost of FCNR funds, a corporate banking chief said.

 

For companies that have good dollar earnings through exports, the impact might not be much as they have a natural hedge. However, for low dollar-earning companies that borrow foreign currency to meet their import requirements, the scheme might become relatively less attractive, he added.

The Libor stands at 6.5 per cent, and with banks fixing a two per cent spread and given that the present forward cover stands at eight per cent, the cost to the borrower, without taking into account interest tax, will be 16.5 per cent.

But, if forwards rise, to say 11 per cent, on account of depreciation, the cost would jump to 19.5 per cent, which is much higher than the current prime lending rates of banks and financial institutions.

External commercial borrowings (ECBs) are cheaper since corporates that access them can get a much deal depending on their risk assessment. Besides, there is no interest income tax incorporated in the cost of borrowing. Because of the interest income tax caveat alone, loans against FCNR(B) deposits fall more expensive than ECBs, even if corporates dont go in for a cover, since banks will load the tax burden onto the customer. This will cause them to raise their costs to recover their spread. However, banking sources claim that the formalities required to obtain an FCNR(B) loan are relatively less.

The main customers will be those who are not able to raise external commercial borrowings because of their relatively high risk assessment. Banks can now expand their FCNR(B) funds in three ways: either they can keep it offshore and earn the Libor rate of interest, or they could swap it for rupees and trade it in the money market, or trade the deposits as they stand in the forex market.

However, the caveat for that would be that they would have to book the forward premium. Earning a spread of 150 to 250 basis points by giving foreign currency loans is a relatively attractive option, and has been well received by the banks as a new source of revenue.

Most banks are formulating their internal guidelines for disbursing rupee-denominated foreign currency loans against their FCNR (B) deposits. Some, however, will not formulate specific guidelines, but will disburse the loans on the basis of the risk assessment of the customer.