Mumbai: The country’s largest lender, State Bank of India (SBI), is unlikely to go ahead with a plan to raise $5 billion by selling dollar bonds in global markets this financial year because companies are no longer shopping around for high-value loans—a reflection of both the high interest rates and the poor investment climate in the country. The bank may revisit its plan in 2012-13.
The money was expected to fund the investment plans of Indian firms and multinationals with significant business interests in India. SBI had initially planned to raise as much as $5 billion by December through the issue of medium-term notes (MTNs). SBI chairman Pratip Chaudhuri was quoted by news agency Press Trust of India on 8 July, stating “...we hope to raise $5 billion by December by means of foreign debt through MTNs”.
The bank has decided not to go ahead with its capital-raising programme at least till March as many of the firms that had earlier approached it for money have backed out due to multiple reasons, including the absence of timely clearances for proposed projects, lack of reforms in crucial sectors and an overall slowdown in demand, according to senior SBI officials, who did not want to be named.
An increase in the cost of raising funds through such channels in international markets has also deterred SBI from exercising MTNs in the current financial year. In the absence of sufficient demand from borrowers to deploy the funds, the exercise will add to its cost of the funds, the officials said. Banks raise such large amounts of money only if they have a strong credit commitment from companies. “The demand for loans from India-linked corporations has fallen drastically in recent months. Also, the cost of raising money has risen,” one of the SBI officials said. “In such a situation, we may not exercise the MTN scheme, at least in the current fiscal.”
The MTN programme enables banks to raise funds abroad through products such as floating-rate notes and fixed-rate bonds. Investors in such dollar bonds include private equity firms, banks, insurance companies and hedge funds. Typically, the interest rate on such bonds is based on the prevailing spreads above the five-year mid-swap or US treasury rate, and also depends on the market where the bank raises money. Mid-swap is the equivalent of the London inter-bank offered rate for longer maturity bonds.
According to senior bankers, other banks that had planned to raise money abroad are also unlikely to go ahead with their plans. Besides SBI, ICICI Bank Ltd and Axis Bank Ltd have previously tapped the global markets using the MTN route and have raised at least $1 billion each. Several state-run banks, including Bank of India and IDBI Bank Ltd, have also used the route. SBI launched its MTN programme in 2004 and has so far raised around $4 billion. It currently has a headroom of $6.1 billion to raise such funds.
Mint’s Dinesh Unnikrishnan says a slowdown in loan demand means SBI is unlikely to go ahead with its plan to raise $5 billion through dollar bonds
“Pricing (interest rate at which dollar bonds are issued) does not suit banks to go for capital raising internationally in the current scenario,” Partha Mukherjee, head of treasury at Axis Bank, said. He added the cost of raising funds in international markets has gone up by at least 50 basis points (bps) in the last two-three months and 100-200 bps in the last one year. One basis point is one-hundredth of a percentage point.
Traditionally, banks approach international markets to raise funds as this is a relatively cheaper option compared with capital raising in the local market, where the lending rates have sharply risen in the last one year due to successive rate hikes by the Reserve Bank of India to fight inflation. In February, SBI had raised 325 million Swiss francs. It has also raised at least Rs 5,000 crore through two rounds of retail bond issues this year in the domestic market.
Rajesh Mokashi, deputy managing director, CARE Ratings, agreed that in the current scenario, banks are likely to defer fund raising plans. “Interest rates (cost of raising funds) in international markets after the euro zone crisis are somewhat volatile and on the higher side. In this context, banks deferring fund raising programmes is not an unconventional or abnormal move,” he said.
In recent years, SBI has been attempting to increase its share of revenues from overseas business by sharpening its focus on companies that have strong India links. Currently, it has 170 foreign offices, including five subsidiaries.