The Hindu Business Line : Overseas debt losing flavour as costs mount

Potential long-term borrowers are quietly beginning to return to the domestic financial markets, where the rates are higher by about 50 basis points.

C. Shivkumar

Bangalore, Dec 19

The losses in the global sub-prime market have had an unintended fallout in the country – interest in external commercial borrowings (ECBs) has waned.

Banking sources said the loss of interest in ECBs was largely on account of the increased costs. The bankers said the spreads were now in excess of 300 basis points for new borrowings. This was despite India’s investment grade rating in global financial markets.

With the six-month London Interbank offered rate (LIBOR), which is the traditional benchmark used, at 4.95 per cent, the effective costs are closer to about 9.5 per cent. This was inclusive of the spread over LIBOR and current swap costs of about 1.75 per cent.

Besides, the spread was well over what is mandated by the Reserve Bank of India. The RBI had prescribed a spread of 250 basis points over LIBOR in May this year for borrowings over five years and 150 basis points for borrowings below 5 years.

The actual spreads on offer for three-year borrowings are over 200 basis points. However, even these spreads on offer were only for entities that had sovereign backing and well-rated domestic private sector corporates. For those falling in lower rating scales, the spreads were higher or lenders were insisting on credit enhancement mechanisms, a euphemism for guarantees.

Domestic borrowings

Domestic borrowings, on the other hand, were available at discounts of at least 150 basis points to the current prime lending rates of public sector banks. As a result, potential long- term borrowers are quietly beginning to revert to the domestic financial markets, where the rates are higher by about 50 basis points.

Among the potential borrowers that have dropped out or deferred their borrowings include financial institutions like the Rural Electrification Corporation and public sector Syndicate Bank. REC had planned to raise $1 billion and Syndicate Bank $125 million through medium term notes.

Bankers said the reduction in the Federal Funds rates to 4.25 per cent by the Federal Reserve Board on December 11 has had little impact on the six-month LIBOR.

Between October 31 this year and December 18, six-month LIBOR has actually firmed by about 15 basis points, the bankers pointed out, largely on account of the liquidity tightening encompassing some of the world’s largest banks, including the Citigroup.

However, for some of the existing borrowers, the reduction in the rates has brought down their debt service outflows. This is largely because many of the borrowings last year were done at spreads as low as 125 basis points.

In fact, some public sector entities had also managed to negotiate spreads of under 100 basis points. This along with the exchange rate appreciation of about 9.5 per cent since the beginning of this financial year was expected to bring down their borrowing costs.

In fact, many of these borrowers, have now reverted back to leaving their foreign currency exposures unhedged anticipating inflows in the coming weeks.

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