The Hindu Business Line : Banks may charge more for guarantees for ECBs

During the first two months of the current fiscal, for which data is available, ECB access amounted to $5.5 billion, both for working capital and for long-term funding requirements.

For the same period, non-food credit growth was a negative Rs 36,000 crore, against minus Rs 12,000 crore in the previous year. A senior banker asked: “If this is not a reason for worry, what else is?”

The worry stems from the credit offtake reduction from corporate borrowers, including SMEs.

A large number of ECB borrowers are relatively new entities, as is evident from the list published by the Reserve Bank of India.

Cost factor

Most of the entities were in a position to access ECBs at spreads of 75-150 basis points over the London Interbank Offered Rate (LIBOR). The ECB bias was largely driven by cost considerations.

Funds from domestic financial institutions cost 11 per cent plus for AAA-rate corporates, or discount of about 100-75 basis points below the benchmark prime lending rate. All inclusive costs for ECBs are currently at 8.5 per cent. The costs include hedging and guarantee support provided by domestic banks and financial institutions.

Key support

Most ECBs are supported by guarantees from public and private sector banks. The fees range from 2.5 per cent onwards.

ECB lenders seldom extend clean loans, exceptions being top-rated corporates.

This is partly because cross-border lenders rarely prefer physical asset cover, in view of legal issues involved. Instead, it is the guarantors that have the charge on physical assets.

ECBs, however, have contributed to an increase in guarantee fees that comprise non fund-based income of banks.

In the first quarter of the year, Canara Bank and Punjab National have seen surges in such income, from about 9.5 per cent to about 12 per cent of gross income, though the surge has been at the cost of profits from core income.

NIM dips

Net interest margins have seen a dip to about 2.5 per cent from about 3.2 per cent in the corresponding previous period. Besides, bankers said, there are also macro-economic issues supporting the case for hiking guarantee fees.

This included exchange rate volatility and central bank interventions that could fuel inflationary pressures. The RBI had partly addressed the macro issues by restricting ECB access in the middle of last month. Banks are attempting to tweak the micro-level issues by raising the cost of ECBs.

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