Foreign loans: Indian companies get better rates for foreign loans, raise $10.3 bn

Gayatri Nayak, ET Bureau | 13 Oct, 2014, 01.32AM 

Indian companies have managed to borrow more from overseas markets and that too at lower rates since the new government took office, according to latest data from the Reserve Bank of India (RBI).

Although there has been no upgrade of India's sovereign rating, Prime Minister Narendra Modi's reforms agenda has improved outlook for the economy, which has restored confidence of the lenders and foreign investors.

Indian companies borrowed $10.3 billion (about Rs. 61,800 crore) in the four months to July, against $9.3 billion in the year ago period, Reserve Bank of India data showed.

At the same time, their weighted average margin for floating rate loans came down to below 3 per cent over 6-month Londoninterbank offered rate (Libor) from 4 per cent. For fixed rate loans, the minimum rate came down nearly 200 basis points to 10.5per cent against over 12.5 per cent in the same period a year ago.

While floating rate loans are negotiated at a margin over a benchmark, which is the 6-month Libor, and vary with the benchmark,interest rates on fixed rate loans are negotiated by the banks according to the internal policy of individual lenders and are fixed throughout the tenor of the loan. The final pricing, however, in both kinds of loans is linked to the rating of the company as well as the sovereign rating of the country it operates in.

"Overall growth in credit spreads is down as the US treasury yields have come down," said Ananth Narayan, co-head of wholesale banking, South Asia, Standard Chartered Bank. "The contraction in spreads on Indian paper is more than what has happened with the spreads of papers issued by other economies. This is because Indian macro outlook has improved, which has added confidence among the global investors."

A relatively stable currency so far this year has also helped in bringing down the hedging costs. A worrying factor though is corporates are not borrowing from banks in India even when overseas borrowing costs are higher for companies that do not enjoy a natural currency hedge or those that are not export oriented.

Credit growth has slipped to a 5-year low of 9.8 per cent (year-on-year). "Borrowers have been cautious as economic activity remains slow while lenders have been less aggressive on account of asset quality and capital requirement concerns," said Rohini Malkani, India economist at Citi. Besides, firms are directly tapping the market and raising funds through CP as bank lending rate works out more costly. The base rate of acommercial bank ranges from 10 per cent to 10.25 per cent, below which even a top-rated company cannot raise funds. But a top-rated CP can raise 3-month funds at a rate of around 8.5 per cent.