Home >industry >banking >Why Indian companies are saying domo arigato to Japanese banks

Mumbai: Armed with low-cost funds and a liking for India, Japanese banks are emerging as lenders of first choice for Indian firms looking for foreign currency loans. The offshore syndicated loan market, typically dominated by US and European banks, is seeing a shift with the share of Japanese banks rising to 30% in the quarter to March from 14% in the previous quarter, according to Bloomberg data.

Indian firms borrow in dollars through the syndication route; a group of banks get together to lend to the firm. Typically, a company mandates one or more banks to be lead arrangers and find more lenders to meet the requirement.

The shift comes at a time when Japanese banks are adjusting to their country’s experiment with negative interest rates introduced by the Bank of Japan in January. Negative rates have pushed yields on Japanese government bonds to record lows. The near absence of returns in the domestic market could spur lenders to look abroad.

Three out of the top five underwriters of offshore loans of Indian firms in terms of volume were Japanese banks, data from Bloomberg showed.

Lenders from Japan underwrote about $1.8 billion worth of loans out of the total $6 billion worth of loan deals struck so far in 2016, data showed.

Sumitomo Mitsui Banking Corp. (SMBC), Mitsubishi UFJ Financial through its banking arm Bank of Tokyo Mitsubishi UFJ (BTMU), and Mizuho Bank are among the Japanese banks that have cornered a large share of the offshore loan market so far this year. The three biggest Japanese lenders extended only 11% of the total offshore loans borrowed by Indian companies in the March quarter of 2015. This has now moved up to 30% in the March quarter of this year.

Repeated attempts to contact spokespersons of Mizuho Bank and SMBC in Japan and India since Thursday have failed. An email sent to BTMU on Thursday remained unanswered.

A banker said the trend is cyclical.

“From time to time, Japanese banks get aggressive in lending to Indian companies, and this is one of those times. They have got low-cost funding. They have negative interest rates in Japan and so they have to put their capital into use somewhere else. This is one of those moments when Japanese banks have been very aggressive not just in India but Asia as a whole," said Piyush Gupta, chief executive officer at DBS Bank, in an interview on the sidelines of the launch of DBS’s digital bank in India.

One of the marquee deals that the Japanese lenders were involved in was the $1.8 billion borrowing by ONGC Videsh Ltd in March—the largest deal for the quarter, according to Dealogic. Of this $1.8 billion, the top three Japanese lenders underwrote a little over $500 million. Reliance Industries Ltd has borrowed about $980 million in two tranches this year, of which more than $150 million came from Japanese banks, according to Bloomberg data.

Emails sent to both Reliance Industries and ONGC Videsh on Thursday remained unanswered.

Apart from the syndicated loans, Indian companies and Japanese lenders are also striking significant bilateral loan deals, said two bankers familiar with the market, who asked not to be identified.

“Japanese banks are giving large bilateral loans to companies at cheaper rates, which is an indication of how aggressive they are," said one.

Lenders are offering loan costs, known in technical parlance as all-in cost, that are 30-40 basis points lower than offers from European or US banks, the banker added. One basis point is one-hundredth of a percentage point.

The cost advantage still holds even though the Bank of Japan didn’t announce any further stimulus at its policy meet on Thursday. The BoJ kept policy rates unchanged, which means that it would continue to charge 0.1% interest on deposits that commercial lenders keep with it.

Given that all-in costs of Indian borrowers are capped by the Reserve Bank of India, borrowers are keen to reduce their interest rates as far as possible.

The all-in cost that an Indian borrower can pay to offshore lenders is capped at 500 bps above the London Interbank Offered Rate (Libor) for long-term loans and 300 bps over Libor for loans up to five-year maturity.

To be sure, lenders prefer to give loans mostly to top-rated Indian firms such as ONGC Videsh, Reliance Industries and Hindustan Petroleum Corp. Ltd. However, firms with a lower rating have also been able to draw funds albeit in small amounts, bankers said. “We are guided by the financial strength of the borrower and give credit to only good Indian companies. Business has been growing," said an executive at a Japanese bank, who asked not to be named.

Overall, offshore borrowing by Indian companies has dropped by 25% so far this year, compared with the same period last year. Offshore borrowing started falling last year as global markets turned choppy and demand for long-term funds fell.

Companies borrowed $28.16 billion through ECBs (external currency borrowings) in 2015, the lowest since 2010 when such borrowings were $23.77 billion, according to data from the Reserve Bank of India.

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