The Hindu Business Line : Banks defer plans for ECB funds

WITH little demand for foreign currency funds, banks have deferred their plans to raise funds through the external commercial borrowings (ECBs) route.

Banks are allowed to raise up to 25 per cent of their Tier I capital through ECBs to augment their rupee resources for lending.

So far only a handful of them have raised funds through this route. These include Canara Bank and ICICI Bank. Canara Bank has raised a total of $100 million of one-year ECBs through two tranches. ICICI Bank has raised about $300 million for a longer tenure.

Bankers said that barring these rounds of borrowings, additional ECBs during the current fiscal have been put on hold. One of the major reasons is that the banking sector continues to be awash with liquidity on the back of swelling deposits and a lower-than-anticipated growth in credit. Besides, banks also have shown large accretions in foreign currency deposits, particularly FCNR and Resident Foreign Currency Accounts.

Most of them are prepared to lend foreign currency deposits only to borrowers who have export earnings or where borrowers are prepared to fully hedge.

Most borrowers, on the other hand, prefer to leave the positions open anticipating a favourable exchange rate.

Consequently some of the banks who had raised funds through ECBs had parked them in gilts.

The total cost of raising ECB funds, inclusive of a one-year forward cover is currently in the range of about 2.5 per cent.

Parked in 91-day or 364-day treasury bills, banks are in a position to earn a spread of anywhere up to 1.5 to 2 per cent.

This is because yields on these securities are in the range of 4.3 per cent and 4.5 per cent, respectively.

But bankers said that these arbitrage operations with ECB resources was increasingly being discouraged by the Reserve Bank of India and the Ministry of Finance. Neither the Government nor the RBI is keen to permit an appreciation in exchange rates from the current levels in view of the potential for adverse impact on the export earnings.

There is also a fear that such unbridled arbitraging could destabilise the domestic money markets.

Another reason is that the ECB markets have tightened. Bankers said few would be in a position to raise funds on the same terms as last year.

This was evident from the fact, that the US treasuries were at least 40-50 basis points higher.

Besides, forward premiums have also been on the ascent powered by concerted intervention in the forward markets by the RBI.

One-year US treasury bond is currently 1.73 per cent and five-year bond is 3.05 per cent.

Any revisit of ECBs by domestic banks is therefore likely only if there is a substantial credit pick-up or if international rates fall.

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