Idbi May Allow Loan Currency Conversion

The Industrial Development Bank of India (IDBI) plans to allow corporates to convert existing rupee loans into foreign currency loans only in specific cases.

Such a conversion was allowed earlier only by the Reserve Bank of India (RBI) on a case-to-case basis.

According to guidelines spelled out by the RBI credit policy in April, it has been decided that such transformations may be considered only in case of weak units as a relief measure, provided the companies have the edge of natural hedging in the form of adequate exports of at least 50 per cent of sales.

According to sources, companies with natural hedging can use their export earnings in foreign currency to pay back their overseas loans so that fluctuations relating to currency is taken care of. Permission for loan conversion will help these companies immensely because the present difference between rupee loan and foreign currency loan comes to about 10 to 11 per cent.

 

Interest burden on rupee loan varies between 19 to 20 per cent whereas the interest on a dollar loan comes to Libor-plus 3 per cent which adds up to around 9 per cent, a source said.

However, for companies which do not have natural hedging advantage another 8 to 9 per cent has to be added for forward-cover which will increase the cost of the foreign currency loan to around 15 per cent.

This figure is not drastically lower than the cost of a rupee loan.

The IDBI had received a substantial amount of proposals for such conversion in order to reduce interest burdens.

According to RBI governor C Rangarajan' statement on credit policy:

"There are corporates willing to convert some or whole of their rupee liabilities into forex liability. The RBI has been approving rupee/ foreign currency swaps between such corporates on a case-by-case basis.

It is now proposed to allow authorised dealers to run a swap-book within their open positions/gap limits to enable them to arrange such swaps without RBI's prior approval.

Such a measure will enable those requiring long-term forward cover (including banks) to hedge themselves without altering the external liability of the country."