The Hindu Business Line : Shipping cos look to domestic banks for fleet expansion

Indian shipping companies planning to make the most of cheap valuations of cargo and tank ships globally, can hope for some strong backing from domestic banks in their fleet expansion efforts.

With leading foreign banks shying away from arranging foreign currency loans due to their exposure to the sub-prime crisis and toxic assets, the Indian Banks’ Association, at the behest of the Government of India, has set up a working group to look at how best Indian banks can help domestic shipping companies in their capacity expansion plans.

The Association set up the working group recently after the Shipping Secretary broached the matter with the Finance Secretary about issues facing the Indian shipping industry.

Distress sale

With shrinking global trade impacting freight rates adversely, many shipowners, especially those in advanced countries, have been forced to go in for distress sale of their in-service as well as under-construction ships.

Given the situation, Indian shipping companies see a golden opportunity to make acquisitions so that they are well positioned to reap the benefits once global economic recovery happens.

Foreign currency loans

Before they got embroiled in the global financial meltdown, foreign banks in India could easily arrange foreign currency loans due to their strong presence in global financial centres such as London, New York, Tokyo, Hong Kong, Singapore, etc.

Repayment period

They had the wherewithal to give loans with repayment tenure stretching up to 15 years. Hence, Indian shipping companies tapped foreign banks.

In sharp contrast, even the large Indian banks, due to their limited balance sheet strength and asset liability mismatches, are able to give foreign currency loans only to a limited extent that too with a repayment period of around eight years, said a senior official with a leading shipping company.

Capital-intensive

“Shipping is a capital-intensive business. With foreign banks shrinking from providing loans, we hope domestic banks will support us by increasing the percentage of bank finance vis-À-vis our own equity, charge softer interest rates, and allow a longer loan repayment period,” said the official.

According to industry estimates, Indian cargo ships carry just 13 per cent of the country’s exports while the major chunk —. 87 per cent — is carried by foreign vessels.

Ship conversion

With 40 per cent of India’s cargo ships set to be scrapped due to wear and tear, or phased out (the International Maritime Organisation has directed that by next year, all shipping companies have to replace single-hull ships with double hull ships so that oil slicks can be prevented) over the next couple of years, Indian shipping companies need huge funding, estimated at $20 billion by the Indian National Shipowners Association, from banks just to maintain their collective cargo carrying capacity at 13 per cent of India’s exports.

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