Hdfc First Pvt Bank To Conclude Rate Option Deal

HDFC Bank has become the first private sector bank to conclude a structured interest rate option deal. Until now, three deals had been reached, all by foreign banks.

HDFC Bank arranged the deal for Flex Industries, which had opted for a $12 million floating rate, three-year loan. HDFC Bank arranged for Flex to buy an interest rate cap, which will protect the company from interest rate movements within specified limits.

The instrument works as follows: suppose the client's interest cap on the higher side is at, say, 7 per cent. If the interest rises beyond this, then the customer pays only 7 per cent, but only up to a limit. For instance, if the interest rate goes up over 8 per cent, the corporate is not protected.

 

Similarly, there is a specified lower limit also. For instance, if the lower rate limit is 3 per cent and the rate dips below this level, then the customer will not be able to take advantage of it and will have to pay 3 per cent.

The structured interest rate option has been modelled by HDFC Bank after the Reserve Bank allowed the issue of derivative instruments in August 1996.

According to Luis Miranda, head of foreign exchange and derivatives section, HDFC Bank, corporates are increasingly going in for low-cost foreign currency loans and seeking to manage their risks.

HDFC Bank has also concluded two, five-year dollar-rupee currency swaps amounting to $17 million. These are among the first long-dated rupee currency swaps booked in India after the RBI allowed banks to run a swap book and corporates to swap a rupee liability into a foreign currency.

These swaps will enable the bank's clients to hedge risks arising from a change in the value of the rupee and to swap rupee borrowings into a foreign currency-denominated liability.

HDFC Bank structured the transaction so that the bank was a counterparty to both the clients. The bank, thereby, assumed the counterparty credit risk besides arranging and structuring the transaction.