ECBs: Will the traffic decline

Updated: Nov 21 2005, 05:30am hrs
With the uninterrupted rise in US interest rates for the last one year which may further keep moving northward in future, the dilemma for India Inc is whether external commercial borrowings (ECB) are still an attractive option for fund raising.

The Indian currency in recent times has depreciated substantially against the dollar, which is further making cost of such funds more expensive. Sushil Maroo, director, finance, at Jindal Steel and Power Limited (JSPL) said, "The interest rates have hardened in the US, and there are indications that the Indian rates may follow suit. It is expected that the difference between domestic and international rates would still be about 100 to 200 basis points. Hence, for corporates, specially those with an export focus, the ECB route would still be attractive." Said Development Credit Bank treasury head K Harihar, "ECBs are still the flavour in the market, as India Inc is on an expansion mode, and companies require funds either for their projects, or working capital requirements. Moreover, it is seen that ECB is much more attractive among mid-cap corporates as compared to the large corporates, which normally prefer the foreign currency convertible bonds (FCCBs) and American Depositary Receipt (ADR) routes."

However, another school of thought holds that interest rates are experiencing an upward pressure in India, and has caused a narrowing of spreads between ECB and rupee borrowings.

SK Mitra, director, financial services at Aditya Birla Group said, "The ECB route for Indian corporate entities is becoming less attractive not only because of hardening of interest rates globally, but also because the rupee is constantly weakening against the dollar. This went contrary to market expectations and as a result, the some of the Indian companies had to incur some losses as the currency risk was not fully covered."

He added that export-oriented companies like IT companies have done comparatively well.

Partho Mukherjee, head of treasury, UTI Bank, also observed that: "Interest margins seem to be declining these days, after global rates have gone up. There is a decline in the number of corporates tapping the ECB window." Another senior corporate executive from the construction industry pointed out that the ECB route held good for companies notching significant revenues from exports.

"At the outset, I would say, it is advisable for construction companies to take the global depositary receipt (GDR) and the foreign currency convertible bond (FCCB) route. But if the rupee-dollar fluctuation continues and the dollar becomes stronger, then the companies will have to shell out 15-20% more for long term loans."

Meanwhile, RBI said that the number of ECB deals have come down. For instance, the central bank said that the country's net capital inflows during the quarter ended April-June 2005-06 declined to $924 million, from $1.075 billion recorded in the corresponding quarter of the preceding fiscal.

A dekko at prevailing rates shows that, if the six months' London Inter Bank Offer Rate (Libor) is hovering around 4.58% to 4.65%. A AAA-rated corporate can raise funds from the ECB route at 1.5% to 2% over and above LIBOR, that is in the range of 6% to 6.5%. Taking into acount the hedging cost for these borrowings, the final rate of ECB is pegged at 6.5%-6.75%. Comparatively, rupee loan rates available for the same corporates are in the range of 7% - 7.25%. Is the small difference worth the risk