The Hindu Business Line : Rush for swapping as rates move up overseas — Banks to apply exposure norms on ECB refinancing

Banking sources said that during the last few months, several large corporates attempted to substitute ECBs with domestic debt, owing to the steep increase in international interest rates. The US Federal Reserve Board had hiked Fed funds rate to 3.5 per cent and the US discount rate to 4.5 per cent.

The domestic corporates had resorted to ECBs in 2002 and 2003 when international interest rates were considerably lower than domestic rates. Some ECBs came at rates as low as 2.5 when the London Interbank offered rate was 1.75-2 per cent. Coupled with low forward premia, the effective financing costs were low.

However, bankers said most borrowings were on a floating rate. With the series of hikes in the US interest rates, LIBOR is currently upwards of 4 per cent. This has meant a steep increase in debt servicing costs for those corporates who had taken ECB route for raising funds. Moreover, bankers said rates were poised to rise further with further hikes in US Fed rates. Consequently, bankers said, though the forward premia (0.4 per cent for six months) in the country was currently low, the interest rate edge no longer existedin ECB financing.

In fact, bankers said most corporates were eyeing fixed rate funds, for extended terms, for refinancing ECBs. But these were not available for long periods, they said. Interest rate resets would happen only after three years. Besides, domestic interest rates were expected to remain stable for some more time. Currently, term funds from domestic banks are available at rates as low as 7.5 per cent.

Yet, despite the big rush for refinancing ECBs, bankers said they would apply the exposure norms applicable under RBI guidelines. This despite debt equity ratios of the borrowers remaining well within the stipulated guidelines of 1.5:1. These guidelines allow bankers to assume single or group credit exposure up to 15 and 40 per cent of the capital funds (tier one and tier two respectively), with an additional allowance of 5 and 10 per cent respectively for designated infrastructure projects.

In fact, some corporates had resorted to ECBs to bypass these limits, especially as cross-border lenders were not bound by these limits.

Cross-border financing is based on the lenders' due diligence and the debt servicing capacity of borrowing entities.

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