With overseas borrowing rates plunging to a historic low amid global financial slowdown, several Indian banks and housing finance companies are now induced to opt for overseas borrowings.
The interbank cost of borrowing three-month dollars currently has fallen to an all time low, according to the latest daily fixing from the British Bankers? Association, a day after the rate dropped below 1% for the first time ever. The spread of three-month London interbank offered rates (Libor) over Overnight Index Swap (OIS) rates for dollars fell to 78 basis points, it?s lowest since late August 2008. The spread expresses the three-month premium paid over anticipated central bank rates, or OIS rates and is seen as a gauge of banks? willingness to lend to each other?a wider spread is seen as an indication of decreased inclination to lend.Euribor, the rate that banks say they charge each other for three-month loans in euros has also slid to the lowest since May 2006, according to the European Banking Federation.
Confirming the development RR Nair, director & chief executive, LIC Housing Finance said the given the low interest rate scenario in overseas markets his company is planning for an external commercial borrowing (ECB). ?We may go to ECB route for raising capital worth Rs 1000 crore. But, we are looking for good rates. What we are looking for there should be at least 100-150 basis points advantage over domestic market range. If something comes up around that level, we will definitely go for ECB. It could be either this quarter or even earlier too.?
Shankarnarayan R Rao, executive director, Exim Bank said the institution is planning to raise Rs 6,000 crore from the overseas market in the current financial year. ?The cost of funds in the overseas market is currently going down. Now the cost of long term funds in the overseas market is around Libor plus 400 basis points. I think, it will gradually come to Libor plus 250 basis points?an attractive proposition. Short-term funds in the overseas market are currently available at as less as Libor plus 150-200 basis points fortunately,? he added.
Keki M Mistry, managing director of the HDFC, largest domestic housing finance company, explained that the liquidity in the overseas fund market is gradually improving although cost of funds is still relatively high. He expects the situation in the overseas market will improve further in coming times. ?In India, the gap in cost of funds for well rated and not so well rated companies has widened a lot. Thus for some Indian companies, over a period of time, overseas fund raising could turn out be a better option,?
Also, for export oriented companies, since they do not have to bear the foreign currency hedging cost, raising funds through external commercial borrowings is relatively cheaper, he affirmed.
However, TS Narayanasami, chairman & managing director, Bank of India, said that considering the current scnario, ECB plans for any company may be good only for short-term borrowing. But, when it comes to long-term exposure, things are not favourable at all. ?Cheaper interest rates and the availability of resources are two different things and hence can?t be linked. So, first international liquidity has to improve. It means that the sourcing has to be done first. But, the climate is not favourable for the same overseas for obvious reasons. So, I think that confidence in the international banking is a must before me to take a call on that front.?