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Business News/ Industry / Banks rush to raise money where companies fear to tread
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Banks rush to raise money where companies fear to tread

July fundraising by SBI opens gates for overseas borrowing; at least two more banks to follow suit

SBI raised $1.25 billion on 26 July by selling five-year bonds at 4.125%. Photo: MintPremium
SBI raised $1.25 billion on 26 July by selling five-year bonds at 4.125%. Photo: Mint

Mumbai: After almost a year, Indian banks have started tapping offshore investors for cheap money they can give to local companies that have been struggling to raise funds for their overseas needs.

In July, the State Bank of India (SBI) raised $1.25 billion (around 6,962 crore) and Exim Bank, $500 million.

Close on the heels of SBI and Exim Bank, which together raised $1.75 billion in July, ICICI Bank Ltd, Union Bank of India and Indian Overseas Bank raised a total of $1.6 billion last week.

At least two more banks will soon enter the market to raise money and many may follow them.

The banks are raising money when the global economic outlook is uncertain and credit rating agencies Standard and Poor’s and Fitch Ratings Inc. have revised India’s outlook to negative from stable, making overseas money potentially more expensive for Indian entities. The Reserve Bank of India (RBI) data shows corporate borrowings from abroad have slowed in the last one year.

Indian companies raised about $2 billion from the overseas market in June 2012, down from $4.16 billion in June 2011. In May, they had raised $3.37 billion but Reliance Industries Ltd accounted for about 60% of that.

Overseas investors continue to be comfortable to lend to Indian banks.

The rush from Indian banks has been driven by global liquidity, said Naresh Takkar, managing director of Icra Ltd, Moody’s India associate.

“Though there are concerns over the domestic economy, money is available in the international market and fears of event risks have also come down. Banks deploy money wherever they get positive spreads. They can also naturally hedge their currency risk which is not the case with companies. This is why for companies, raising money is more difficult," Takkar said.

Smaller companies, say bankers, are not getting money from the overseas lenders. The rates being offered to Indian companies have also widened to up to 500 basis points (bps) over the Libor (London Interbank Offered Rate) from up to 400 bps above Libor previously. One basis point is one-hundredth of a percentage point.

Six-month Libor is now around 72 bps. Interest rates for banks are still very competitive, around 350 bps over Libor.

“The companies that are taking dollar loans need to have foreign currency earnings. Since export growth is falling, from where will they get the dollar resources to pay back the money to banks? If they don’t have dollar earnings, they will have to hedge their exposure," said an executive director of a large bank who didn’t want to be named.

Since the hedging cost is around 6-7%, for those companies which do not earn dollars, foreign currency loans from banks become very expensive. For such borrowers, banks are running default risks.

SBI, India’s largest lender, raised $1.25 billion on 26 July by selling five-year bonds at 4.125%. This was the first instance of a public sector bank tapping the overseas market since May 2011. The bond was priced at 375 bps above the prevailing five-year US bond at the time of the issue and was the largest single-tranche offering by a public sector bank from India. It received bids worth $6.8 billion.

“The State Bank of India issue opened the gates because it showed there is demand for Indian paper. Banks always need money to meet the credit demand from companies and there could be more in pipeline because SBI has created a benchmark for other Indian banks," said Jayesh Mehta, managing director and country treasurer, global markets group, Bank of America Corp., one of the managers for the bond issues of ICICI Bank, Union Bank and SBI.

Another executive of a US bank involved in all five transactions said Indian banks have timed their issues well. “Global debt markets were quiet for many months and there was a lot of pent-up demand for Indian paper. The coupon was also lower than what they had paid in 2010. More Indian banks could come to the market."

In 2009-end, SBI had raised $750 million, five year money, at 4.5%.

ICICI Bank raised $750 million through a 5.5 year bond at 4.70%. The issue was was subscribed 7.6 times and had an order book of $5.7 billion.

Both Chennai-based Indian Overseas Bank and Mumbai-based Union Bank raised money at identical rate—4.625%.

This is Union Bank’s first offering after a $400 million issue in August 2010. The bonds were originally priced at a higher rate but strong demand pulled down the rate by about 20 bps.

Syndicate Bank Ltd and Allahabad Bank could be in the market in next few weeks but the relatively large public sector banks may take time to tap the overseas investors.

“We don’t immediately have any plan to raise funds from overseas market. But we are watching the space and as and when required, we will tap into the market, may be even in this calendar year," said Bank of Baroda chairman and managing director M.D. Mallya. For larger banks, the minimum size of overseas bond issuance is usually $500 million.

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Published: 19 Aug 2012, 08:11 PM IST
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