Banks dip into FCNR(B)s to meet India Inc $ needs

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New Delhi: With overseas loans not forthcoming amidst frozen credit markets globally, India Inc is using an interesting alternative to raise dollar funds. Companies are increasingly turning to domestic banks who are lending funds from their FCNR (B)—or foreign currency non resident (Bank) deposits—portfolio. “The reason for the recent spurt in dollar lending in the local market is that Libor is coming down and overseas credit markets are closed,” said Punjab National Bank chief general manager Arun Kaul.

The London Inter Bank Offered Rate for three-month dollar loans was at 2.2% on Tuesday, down from its September peak of 6.88%.

The decline in Libor means the pricing of loans for companies have become attractive. In fact, the cost difference between the dollar loans raised abroad and in the local market is disappearing fast.

The cost of raising dollar loans in India—including banks’ margin, forward cover and transaction charges—comes close to 10%, a currency analyst who is arranging such loans for a number companies said, asking not to be quoted.

Even triple-A rated companies are now being asked to pay a spread of as much as 5-6% above Libor by overseas lenders, taking the total cost including hedging and transaction charges to over 10%. This makes the cost of local dollar debt comparable if not cheaper than the overseas loan. This is sharp departure from the recent trend when overseas loans were much cheaper than the local dollar loans.

Indian banks’ cumulative deposits in their FCNR (B) portfolio amounted to $13.448 billion till September 2008, as per the RBI data. Banks are permitted deploy these funds to provide short-term foreign currency loans to their customers. In the wake of massive capital outflows, the Reserve Bank of India has raised interest rates on NRI deposits thrice in the last two months.

The rates on FCNR (B) deposits have been raised by 175 basis points to Libor plus 100 bps, enabling banks to attract higher NRI deposits, which increased to $787 million in the April-September 2008, compared to withdrawals of $78 million in the same period last year.

Under this scheme, NRIs can deposit funds in Pound Sterling , US Dollar, Canadian Dollar, Australian Dollar, Euro and Japanese Yen.

While the increase in deposits rates have enabled banks to raise funds from NRIs, declining Libor have meant the pricing of these funds to corporates have become cost effective.