Mumbai: The cost of dollar loans is at a historic low, but companies are finding it difficult to raise such funds from banks because of an acute shortage of the US currency in the market. Only companies with the highest rating have been getting loans from the overseas branches of Indian banks, the avenue through which they raise most of their trade finance loans.
Such loans typically have a maturity of up to three years. For longer tenures, banks opt for syndication, which involves a group of lenders.
In the past few weeks, ever since the euro zone debt crisis and the US downgrade, lower-rated firms have been finding it difficult to raise trade finance because Indian banks have become selective owing to the shortage of dollar in the system.
The spread between the one-year overnight index swap (OIS), a good indicator of Indian interest rates, and the one-year Mumbai interbank forward offer rate (Mifor) is at its highest since at least October 2002, Bloomberg data shows.
Mifor is a mix of the London interbank offered rate, an international benchmark, and the forward premium on the dollar-rupee exchange rate—effectively, the cost of dollar money. The spread between the two indicates the possible savings in raising overseas money.
Between 2002 and 2006, there was not much difference in final rates between domestic money and overseas money. In some cases, after hedging, overseas money was actually costlier. Currently, the spread between one-year Mifor and OIS is 3.5 percentage points, having widened to 4.44 percentage points a fortnight back.
Due to the dollar shortage, the local currency dropped 2.21% against the US currency last fortnight. It closed at about 46 to the dollar on Wednesday.
“In this environment, we have to be selective, but we have not denied any dollar loans to our good customers,” said Canara Bank chairman and managing director S. Raman.
Canara Bank has a “reasonable” stock of dollars at its overseas branches, Raman said, adding that the shortage could be temporary.
Bank of India is also being selective in giving loans, said chairman Alok Misra.
“We have recently raised foreign currency funds through our mid-term note programme. Our branches have enough dollars with them. But we have to exercise caution... We are giving dollars only to those customers who have a good rating and credit history,” Misra said.
Executives at three mid-cap companies said they have not faced any kind of shortage, but it will be challenging for them if banks don’t provide dollars for business requirements.
“The dollar shortage is going to be a short-term phenomenon. Companies may find it difficult to source dollars as financial institutions are backing out in the light of the economic (uncertainty), but the trend will reverse shortly,” said a senior executive with a private airline. Neither he nor executives from other midcap companies wanted to be identified.
The dollar shortage will largely affect small and medium sized companies, said Vineet Suchanti, managing director of investment bank Keynote Capitals Ltd.
“Large companies can always access dollar funds as banks prefer larger clients. Midsize companies have to resort to borrowing at 12.5% interest rate and they don’t have a natural hedge unlike large corporations,” he said.
Suchanti’s firm largely services small and medium sized companies.
An executive at a small hospitality company said his firm was facing problems in raising dollar loans from banks. He did not want to be named.
Subba Rao Amarthaluru, group financial officer at GMR Group, said his company was not facing any issues due to the dollar shortage.
Why dollar shortage?
The dollar shortage is attributed to India having paid an estimated $5 billion (around Rs 23,000 crore today) to Iran as payment for oil between July and August. This has put the squeeze on dollar liquidity and weakened the local rupee against the US currency.
Despite the US downgrade, the demand for US government bonds and the currency has risen as investors consider them safe havens. The premium for the dollar has shot up and forward rates have crashed in India.
“Typically, the difference between the spot and the forward rates is at about 20 paise. Now the difference has been reduced to about 7 paise. The forward rate also went to a discount few days back. This shows that the spot rupee is trading at a premium,” said Pramit Brahmbhatt, chief executive officer (CEO) of Alpari Financial Services (India) Pvt. Ltd, a firm that specializes in advising retail customers on currencies.
“It is a global phenomenon and not limited to India. Those who have dollars do not want to part with them now and banks are charging a premium to make some quick profit,” he added.
Foreign institutional investors (FIIs) are also pulling out from the Indian equities market, adding to the pressure. In the last one month, FIIs have pulled out a net $1.73 billion from the stock market.
“We have always tried to bridge our huge current account deficit through capital flow. When the FIIs pull out, it is bound to create instability in the exchange-rate market,” said A.V. Rajwade, an independent foreign exchange consultant and a columnist.
According to Rajwade, who also writes a column for Mint, this is a basic demand and supply issue and there is not much the Reserve Bank of India (RBI) can do.
“Indian banks are unable to raise dollars from the overseas interbank market..., but the basic shortage is in the rupee market itself,” he said. “Banks don’t have enough liquidity. If RBI wants to help banks by giving them dollars, it will have to buy the equivalent amount of rupees that will again squeeze liquidity from the system and rates will further go up.”
The situation is not something to panic about, said Jamal Mecklai, CEO of Mecklai Financial Services Ltd.
“The prevailing situation is no doubt bad. But it is not as bad as the 2008 crisis,” he said. “However, India should now move forward a bit towards full capital account convertibility as the rupee’s fate is, in any case, no longer decided in the domestic market alone,” he added.
Ravindra Sonavane contributed to this story.