Mumbai: State Bank of India (SBI), the largest Indian lender by assets, is readying for a mammoth fund-raising exercise in foreign markets to meet increasing demand for corporate loans.
The bank is considering raising as much as $5 billion (Rs 22,500 crore) through the issue of dollar bonds in overseas markets to fund high-value loans to Indian firms having international operations, according to two senior SBI officials familiar with the development.
The money will be raised through multiple tranches over the next one year. SBI’s board is expected to approve the proposal shortly, the officials said. Both of them declined to be named as they are not supposed to talk to the media.
According to the officials, SBI may go for fresh fund-raising as an extension of its existing medium-term notes (MTN) programme, either in the US or European markets. The lender had first launched an MTN programme in 2004 and has so far raised $3.9 billion. As the original board approval was for $5 billion, it can still raise $1.1 billion under the existing MTN programme.
This means the bank can raise as much as $6.1 billion from the overseas market.
“The process is on to raise $3-5 billion from a fresh MTN in overseas markets, which will be used to give loans to Indian companies, once we exhaust the remaining $1.1 billion headroom from the current programme,” one of the officials said.
“The demand for loans from companies is huge. Even if we raise $5 billion, this may not even last for a year,” the official said.
Both the officials declined to name the firms that have sought dollar loans, citing client confidentiality.
“Borrowing in India is becoming increasingly costly for banks. Deposit mobilization is much lower in the current fiscal compared with the last year due to the liquidity constraints in the market. In this scenario, any bank would like to go abroad to raise cheap money,” said D.R. Dogra, managing director and chief executive officer of rating agency Care Ltd.
Although there is a revival seen in the corporate sector, an uncertain external environment and inflationary pressures pose downside risks to the growth story, he added.
An MTN programme allows a bank to raise funds on an ongoing basis through different products such as floating rate notes and fixed rate bonds. Banks raise funds from other banks, insurance companies, hedge funds and private equity firms.
Typically, the coupon for such bonds is calculated based on the prevailing spreads above the five-year mid-swap or US treasury rate, depending on the market where the bank raises money. Mid-swap is the equivalent of the London inter-bank offered rate for longer maturity bonds.
Banks tap such capital as this is relatively cheaper compared with the cost of money in the home market. They go for such issues only when they have a strong credit commitment from firms as otherwise the carrying cost of such large amount of money could well hurt their profitability.
In February, SBI raised 325 million Swiss francs (around Rs 1,640 crore today). It has also raised at least Rs 5,000 crore through two rounds of retail bond issues this year in the domestic market.
Indian corporations are increasingly ramping up their business expansion plans, after a slump in activities in the aftermath of the 2008 financial crisis.
Indian banks’ loan book has grown by 23.2% year-on-year till end-February, higher than the Reserve Bank of India’s projection of 20% for the current fiscal. This is despite a rise in the overall lending rates in the banking system due to successive hikes in policy rates of the Indian central bank.
The apex bank has hiked its key rates eight times since March 2010 to fight rising inflation in the world’s second fastest growing major economy. This has prompted Indian banks to raise their loan rates by at least one percentage point in the past six months.
SBI is readying to aggressively ramp up its business abroad as part of its efforts to consolidate position in the global banking market, where its current rank is 68.
As per a five-year road map set by the bank, the lender is aiming at finding a slot among the top 25 global banks in the next four-five years and for this it will have to raise its asset base to $500 billion, from around $234 billion in March 2010.
Currently, SBI has 155 foreign offices, including five subsidiaries and 13,400 branches. In the last three months, the bank has added four branches—one each in London and New York, and two in Bangladesh.
Overseas business currently accounts for around 16% of SBI’s revenue and the bank plans to raise it to 20% in the next few years.
Although SBI has been scouting for acquisitions of smaller banks in African and Asian regions, nothing has materialized yet, due to valuation differences.
SBI is not the only Indian bank to tap the global market with MTN issues. ICICI Bank Ltd and Axis Bank Ltd raised at least $1 billion each through MTN issues.
Bank of India, IDBI Bank Ltd and Bank of Baroda, among others, also raised money overseas through MTN issues.