The Hindu Business Line : IOB in currency-swap deal with HSBC

Advantages
Borrowing in yen has an advantage in terms of lower withholding tax.
Yen loans are typically low-interest-bearing, although the cost of hedging may be higher

T.S. NARAYANASWAMI

Chennai , Aug. 10

Nineteen European and Asian banks have lent $175 million in Japanese yen to Chennai-based Indian Overseas Bank (IOB) in a deal that was closed in London last week.

IOB has entered into a currency-swap deal with HSBC, effectively protecting the loan from fluctuations in the rupee-yen exchange rate.

(IOB will get Indian rupees for the yen at a negotiated exchange rate. At the end of five years, when the loan is due for repayment, it will pay HSBC Indian rupees and get back the yen.)

The cost of borrowing, including the cost of hedging, works out to "close to 7.75 per cent", Mr T.S. Narayanasami, Chairman and Managing Director of IOB, told Business Line on Thursday.

He said that the bank had held two road shows last month, in Taiwan and Singapore. "The issue met with very encouraging response because of the strong fundamentals of the bank," Mr Narayanasami said.

RBI guidelines

The funds are to be deployed in the bank's regular lending operations. Under the RBI guidelines, a bank is allowed to raise up to 25 per cent of its Tier-I capital as foreign currency loan from overseas market. The $175-m borrowing fully utilises the option.

Mr Narayanasami said the bank got a good rate because "we moved in at the right time". If the bank had delayed the loan raising effort, the cost of borrowing would have been much higher, he said.

"Today, the market for long-term paper is very tight," he said, adding most banks were faced with the prospect of having to borrow short-term while the assets were of a longer term maturity.

This borrowing of IOB helps the bank in maintaining asset-liability match, the Chairman said.

Mr V. Krishnaswamy, General Manager, IOB, said HSBC, Netaxis of Belgium, RZB of Austria and China Trust Bank were among the larger investors, with each picking up around $15 m of the loan.

Mr Krishnaswamy said borrowing in yen had an advantage in terms of lower withholding tax (a tax on interest payments for overseas loans).

Yen loans are typically low-interest-bearing, although the cost of hedging may be higher. But since the tax is only on the interest payments, its incidence is lower on yen loans.

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